Merkel casts doubts of Eurozone as MPC minutes reveal landslide vote for QE

Tom Tong19/Jul/2012Currency Updates

GBP

The pound eased towards the day’s trading as the MPC minutes revealed that the policy committee members had voted 7 – 2 in favour of another round of QE in order to stimulate the economy. This clear majority suggests that there could be room for an additional 25 billion in stimulus in the next quarter. Despite the woes created by the eurozone debt crisis, UK firms are still in favour of European integration according to a poll from the British Chambers of Commerce. On a more positive note, yesterday we saw an unexpected fall in UK unemployment from 8.2% to 8.1%. Today, we have retail sales figures out in the UK which will be closely monitored to gauge consumer demand in the UK after all the recent rain and before the expected Olympic boom.

EUR

The euro continued its recent spate of weakness as the market reacted nervously to comments from German Premier Angela Merkel. In comments lodged on her party website, she alluded to concerns over the longer term euro project and Germany’s commitment, saying ‘we have not yet shaped the European project in a way that we can be sure that everything will turn out well. We still have work to do!’. Despite her general rhetoric suggesting Germany still had a positive outlook for the prospects of eurozone recovery, the lingering doubts in the statement triggered a euro sell-off late in the session.

The IMF has told the ECB it should play a more prominent role in fighting the sovereign debt crisis, suggesting to take a more aggressive stance over bond purchases and rate cuts. One small positive for the eurozone was the marginal increase in construction figures which arrested a sharp decline in April.

USD

The Greenback continued to trade on the sentiments of Ben Bernake’s statement during his second day of testimony. His stance was fairly reticent, continuing to distance the Fed from immediate QE3, but reaffirming that they are ready to take steps to stimulate the economy if necessary and will not let the US economy fall back into recession. The dollar index dropped marginally despite trading to a similar range as the previous day against sterling and the euro. The drop in the dollar index could be attributed to the mooted results of the Fed’s beige book survey which revealed that economic growth in the US had cooled in June and early July, with hiring also growing only at a tepid pace. The overall tone of the report was more downbeat than the previous month, but the dollar still remains bought as safe haven demand continues.

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Written by Tom Tong

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