Caution takes over as fears over Greek and Portuguese solvency return

Tom Tong31/Jan/2012Currency Updates

GBP

Following the EU summit yesterday we saw sterling rise against a weaker euro on Monday as investors waited for the results from the Greek debt swap ahead of an EU summit which was not expected to strengthen the single currency.

Sterling fell against the dollar, however, tracking falls in the euro versus the dollar, after a run of gains. Traders and analysts saw this hit levels which were seen as a good opportunity to take profit on these gains.

Analysts expect the Bank of England to increase asset purchasing under its QE programme in February, especially if the purchasing managers’ survey for January adds to the picture of a weakening UK economy and increase the prospect of more monetary easing.

EUR

At the Brussels summit yesterday twenty-five of the EU’s 27 countries have signed up to a German-inspired treaty pushing tougher fiscal rules to help reinforce the euro. Stocks and Eurozone government bonds and the euro started the week under pressure.

Global stocks were down 0.8 percent and the euro declined from a seven week high against the dollar. Italy’s 10 year sovereign bond yield climbed back above 6 percent and there was a surge in yields in Portugal

Greece is still to reach a debt agreement. It appears Greece currently faces the choice from Germany, either to accept loss of economic sovereignty or to prepare for a default and exit from the euro.

The pressure on the euro has led to a fresh high in the Swiss franc, the strongest level reached since the Swiss central bank intervened to weaken its currency in September. The central bank has said it will step in and buy euros to weaken the franc if the single currency drops below SFr 1.20

USD

The dollar was set to decline further against its 16 major counterparts this month as the Federal Reserve extends its pledge to keep interest rates los through to at least 2014.

The U.S currency dropped 0.3 percent against the euro and the greenback fell as much as 0.2 percent against the yen. Investors headed for safety, the yield on the 10-year US government note fell 5bp to 1.84 percent

Later today we will see the Conference Board release Consumer Confidence in which we expect an increase.

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Written by Tom Tong

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