Increased Eurozone optimism as Greece deal draws closer whilst UK interest rates remain on hold

Tom Tong22/Nov/2012Currency Updates

EUR

With more than a handful of countries threatening a veto ahead of Thursday’s summit, politicians sounded pessimistic about prospects for an agreement on the European Union’s spending ceilings for the coming seven years, in what are usually the thorniest of all EU negotiations.

The euro strengthened against the dollar and yen as leaders of the 27 European Union member nations gather today for budget negotiations. The strength was largely due to optimism that a deal will soon be reached for Greece.

Euro finance ministers said a further meeting on Greece had been arranged for Nov. 26 and that only “technical problems” are holding up a deal.

GBP

European Union leaders are headed to Brussels today for a showdown over the area’s spending budget, in a battle that arguably pits richer against poorer member states, the East of the continent against the West, and the U.K. against almost everyone else.

The pound rose to the strongest in a week against the euro after eurozone ministers failed to agree on a debt-reduction package for Greece and as Bank of England policy makers signalled they won’t cut interest rates.

Sterling held a four-day gain against the greenback after minutes of the central bank’s November meeting showed officials voted 8-1 to stop expanding the quantitative-easing program this month. The majority of policy makers said uncertainty among consumers and companies may be affecting the impact of the stimulus program on the economy. U.K. government bonds were little changed.

USD

Strong Unemployment claims data was the only major news in a largely quiet day for the dollar. On-going uncertainty in the Middle east has led to a rise in oil prices and thus a slightly weaker dollar. Dollar was also weakened against the euro, on increased optimism of a Greek deal.

Latest news of a possible ceasefire in Gaza has eased the spike in oil prices, possible limiting further falls in the dollar. Meanwhile there is also increased optimism amongst investors that US lawmakers will find a solution to the fiscal cliff.

ZAR

The South African rand slid to its lowest level in 3 1/2 years against the U.S. dollar on Wednesday as investors lose faith in the country’s near-term prospects.

The most recent break against South Africa is an unexpected rise in October inflation to 5.6%, which is at the higher end of the central bank’s target range of 3% to 6%. This, market participants say, makes it unlikely the central bank will cut its key benchmark lending rate at its next meeting on Thursday, a previously expected move that could have helped support the country’s flailing economy.

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Written by Tom Tong

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