BOE cut growth forecast as economic woes move from periphery to core in Europe

Tom Tong09/Aug/2012Currency Updates

EUR

The euro fell against its major peers. With German imports and exports dropping more than expected, and with France’s economy likely to slip into recession in the third quarter, there is evidence that Europe’s sovereign-debt crisis is harming the region’s largest economies. Further compounding the euro, The Canadian credit agency, DBRS, cut credit ratings for Spain and Italy.

On the other hand, the credit rating agency, Standard and Poor, revised to negative from stable the outlook on Greece’s economy. The possibility that Greece could run out of money and have to ask for economic aid in the short term is returning. Investors do not believe in the mix of European policies of massive bond purchasing from the ECB along with huge austerity measures from troubled countries which do seem to go anywhere and just worsen the current situation in Europe. Otmar Issing, who worked in the ECB during the introduction of the Euro between 1999 and 2006 said yesterday in an interview “Everything speaks in favour of saving the euro area….How many countries will be able to be part of it in the long term remains to be seen”.

GBP

The pound strengthened against the dollar and the euro after Bank of England Governor Mervyn King said cutting U.K. interest rates would not be the best option to boost the UK economy in the short term. This countered an initial effect of sterling weakness, following the release of the BoE’s UK Inflation Report, where growth forecasts were cut. The Bank of England has cut its growth forecast close to zero as the economy suffers from the malaise from Europe. The number of people being placed in jobs in the UK fell for the second straight month in July.

USD

After the poor data coming out of Europe yesterday, traders switched out of the euro with many moving to the US dollar, while the Japanese yen also had its supporters ahead of Thursday’s expected meeting of the Bank of Japan.

Yesterday, we also saw an auction for 10-year US treasury bonds. Interest on the 10-year note auction rose more than expected yesterday. The U.S. trade deficit narrowed in June as less expensive oil helped cut the nation’s import bill. At the same time, slowing economies in Europe and Asia threaten orders to U.S. manufacturers, indicating exports will also languish. Finally, In China, a fall in the Producer Price Index, Industrial Production and Retail sales suggest that a further easing could happen.

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Written by Tom Tong

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