Political turmoil in Italy weakens the Euro as market anticipates US stimulus

Tom Tong11/Dec/2012Currency Updates

GBP

The pound traded a steady range yesterday despite Vince Cable talking openly about the prospect of a triple dip recession in the UK. Cable warned the UK needed to learn from the situation in Germany and the government need to do all they can to support industrial production to bolster growth. Speaking yesterday Mervyn King warned that the G20 must do more to revive efforts to address global imbalances as more and more countries look to use exchange rates (and its manipulation) as a key tool for monetary policy.

Today in the UK we have the RICS house data being released and a 10 year bond auction, but the market is likely to be preoccupied with events in the US as the Fed mull over further stimulus.

The UK banking sector also took a hit as HSBC was slapped with a record 1.9 billion dollar fine for involvement in money laundering. This follows moves by the Bank of England to take on board responsibilities from the FSA from a regulatory point-of-view.

EUR

The euro initially lost ground yesterday as the market digested surprise news that Italian PM, Mario Monti, is due to resign from his post as soon as his 2013 budget is approved by parliament. Initially, markets reacted negatively to the news as the yield on 10 year Italian bonds jumped and investors worried over the prospect of a Berlusconi re-election.

However, the growing political turmoil in Italy was subdued by a sober Monti as he reassured market participants that the foundations he has laid are unlikely to be unwound and that a coalition government is the most likely outcome when the next round of elections comes to pass.

The Euro ended up 0.5% against the dollar once the furore has abated. Today, analysts are expecting a weak German ZEW figure which is unlikely to boost confidence in the single currency. Whilst many feel a line has been drawn under the Greek crisis, for now at least, the ratings agency S&P still rate the chances of Greece leaving the euro as one in three but the Hellenic government is likely to do all in its powers to avoid this outcome.

USD

The short term movements of the dollar continue to be dictated by negotiations over the fiscal cliff and anticipation of further asset purchasing. The Greenback made initial gains due to a set of robust data releases from China which showed a stronger than anticipated increase in industrial output, although by the end of trading the dollar index had fallen 0.1%.

President Obama softened his rhetoric over the fiscal cliff after a seemingly successful meeting with House Speaker John Boehner. Speaking yesterday in Michigan, Obama struck a conciliatory tone and suggested the fiscal cliff will be averted before the January deadline.

However, as operation twist draws to a close, analysts are anticipating further stimulus by the Fed starting at today’s meeting. The market is anticipating at least a further 45 billion in monthly treasury purchases with scope for further asset purchase. This move has been largely factored in to the market but could spell a spate of dollar weakness.

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Written by Tom Tong

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