OECD adds further support to eurozone bonds

Tom Tong22/May/2012Currency Updates

GBP

Sterling pulled away from a two week low against the euro on Monday as investors moved back into the pound given a gloomier outlook for the eurozone. Sterling had rallied against the euro in recent weeks as investors concerned about political turmoil in Greece and fragility in the Spanish banking sector bought UK gilts, which are still considered a relative safe haven asset. A Bank of England inflation report last week, that warned of the risk to UK growth from the euro zone crisis and left the door open for another round of asset purchases, has curbed some demand for the pound. Later in the week inflation and retail sales data, and minutes from the BoE’s May policy meeting, will be carefully watched as it will give clues as to whether policymakers opt for a further round of QE to boost growth.

EUR

Central bankers from across Europe banded together yesterday to urge eurozone governments to take the opportunity to reform their economies, while they still have a chance. Joerg Asmussen, one of the ECB board members, said that growth is vital to ending the sovereign debt crisis but added that economic reforms rather than spending is the solution. Earlier the euro had gained across the board as speculators cut bearish positions, but persistent worries that Greece may have to leave the currency bloc and also about ongoing problems with the Spanish banking system undermined the euro. Spain saw government borrowing costs edge up and its stocks slip further again over the future of the eurozone as the stability of the countries banking sector continued to unnerve investors. The general outlook moving forward is that European stocks are likely to remain under pressure, and the euro is seen breaking technical support levels, as Greece’s inconclusive election results look increasingly likely to push it out of the eurozone.

The Organisation for Economic Co-operation and Development has joined French and EU officials in calling for a move towards jointly-guaranteed eurobonds at a time it sees as perilous for the global economy.

In its twice-yearly economic outlook, the Paris-based international organisation which specialises in economic policy for advanced economies, warned of a vicious circle in the eurozone, “involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth”.

USD

The ICE dollar index, which tracks the U.S. currencies against a basket of six other units, edged up to 81.071, compared to 80.970 late Monday. This has been a remarkably bullish streak for the dollar, in which we have seen 14 higher closes above the previous session close in a row. We haven’t seen such a move in our entire U.S. dollar index chart history and this is dominating market sentiment.
The eurozone crisis’ rippled effect across the Atlantic has not taken its toll on the dollar but those commodities denominated in the US currency as oil prices are set to extend declines as uncertainty persists over the eurozone’s future. Commodities are likely to remain under pressure catalyzed by a paring back of global growth expectations

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Written by Tom Tong

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