World markets hit by political and economic panic in Europe

Tom Tong09/May/2012Currency Updates

GBP

The Pound spent yesterday blowing in the wind, making gains against the risk-sensitive high yielders, but losing ground against the low-yielding safe haven tenders. This morning’s weak UK housing market numbers once again made little difference, however Thursday’s Bank of England monetary policy decision could be game-changing if the nine-man committee votes for an increase to QE. In the meantime, the Pound is expected to trade with a neutral bias. Sterling hovered within sight of a 3-1/2 year peak against the Euro on Tuesday as political uncertainty in Greece cast doubt on the viability of austerity plans aimed at tackling the Euro zone debt crisis. Strategists said the Pound could extend gains in the near-term if politicians failed to form a new Greek government following a shock election result that called into question the terms of the country’s international bailout. But sterling may come under pressure if debt contagion and economic slowdown in the Euro zone started to affect the UK economy and fuel speculation the Bank of England could extend its asset purchase programme to boost growth.

EUR

The Euro fell heavily across the board on Monday after Greek and French elections cast doubt on politicians’ commitment to austerity plans aimed at tackling the Euro zone debt crisis. Traders said losses, which saw the common currency hit a three-month low against the Dollar, its lowest in 3-1/2 years against the British Pound and a 2-1/2 month trough versus the yen, were likely to be extended in coming days. In Greece the failure of the two main parties supporting the country’s international bailout to secure a parliamentary majority threw into question the future of the programme and potentially Greece’s membership of the Euro. In France Socialist François Hollande, who has championed a longer time-frame for eliminating the deficit, ousted centre-right incumbent Nicolas Sarkozy in a result that could start a push-back against German-led austerity across the Euro zone. The Euro sank to a session low on Tuesday breaking the range it has been trapped in since late January. Traders cited selling by fund managers although trade was expected to be muted during the European day due to a UK public holiday. Some strategists said the break below the Euro’s recent tight range meant it could fall towards the 2012 low against the Dollar. Against the Pound, The single currency fell to lows last seen in November 2008 in the aftermath of the collapse of Lehman Brothers.

USD

With Increasingly nervous sentiment coming from the troubled Eurozone we saw extended gains for the American currency on Tuesday. These ongoing problems have heavily increased the demand for safe havens an in turn sent the Dollar index, which measures the US currency’s performance against a basket of major currencies, up to 79.719 from 79.612 on Monday. Optimism continues to rise in the US as an influential survey by the Institute for supply management suggested that we will continue to see strong growth throughout 2012 with the national federation of small businesses optimism index also rising.

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Written by Tom Tong

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