Continued turmoil in Europe as Cyprus reject bailout terms as eyes focus on Osbourne's budget speech

Tom Tong20/Mar/2013Currency Updates

GBP

Yesterday, the two most popular gauges of inflation, CPI and PPI (YoY) were released showing higher than expected figures. Core CPI printed at 2.3% (YoY), marginally higher than the previous month’s 2.2%, and PPI 1.3% (YoY) from a 1.1% expected. Elsewhere, Retail Sales posted 0.1% less than the market consensus and previous months reading. These positive inflation figures but worse than anticipated retails sales have increased uncertainty ahead of the BoE minutes today. Amid the uncertainty in Cyprus, after politicians voted against the haircut required to trigger the aid package, global equity markets dropped and this was evident in the UK as the FTSE 100 dropped 0.26%.

Sterling gained against the troubled Euro, but traded sideways against the US Dollar, with market participants waiting for today’s BoE minutes before making new bets. Analysts will be particularly focused on any clues over extension of the asset purchase programme. We will also be closely looking at George Osbourne’s budget for any hint of new and alternative policy tools the BOE will be granted to stimulate growth. As such, we could be in for a volatile day for clients exposed to the Pound.

EUR

Yesterday the common currency sunk below a four month low versus the Greenback as the Cypriot parliament rejected the bank-deposit levy determined by Eurogroup, fuelling fear of a short term bailout not materialising. The Euro also lost ground against the pound, briefly reaching levels not seen for the last few months.

After trading a tight range during the London Session, risk aversion seemed to gain pace in the American session as the Cypriot President said the nation’s parliament is likely to vote against the bailout plan and rumours surfaced that the Cypriot Minister of Finance had resigned.

Peripheral bond markets suffered due to the lack of investor confidence with Greek and Portuguese bonds tumbling. The Eurostoxx index lost 1.24%, and German Bund prices soared up to an eleven week high as investors sought safer assets.

Despite positive macro data released yesterday in Germany, it couldn’t calm investors worries as everyone was reminded of the fragility in the Euroblock. The German ZEW Survey of Economic Sentiment and and Current Situation were better than expected, especially the latter which doubled the market consensus. For today, German PPI (YoY) is expected to show a slight fall on last month, but eyes will no doubt be fixed on political developments in Cyprus.

Overnight papers have speculated that Russia may step into the breach to provide emergency loans to the Cypriot banks to protect a haircut on the billions of Russian funds deposited in the banks. This move is not approved by the ECB who do not want to see the sovereign fall further into debt.

USD

The US Dollar Index ratched up narrowly as investors moved to risk aversion, after worries about Cyprus and the lack of macroeconomic figures in North America. This made the dollar a good safe haven bet. The S&P 500 decreased slightly in line with the other main Equity Indexes but we also saw an aggressive drop in the Oil Futures.

Securities investors will be focused today in both sides of the Atlantic, as The Fed’s Interest rate decision, Monetary Policy statement and Bernanke’s speech are all due today. This while European debt turmoil remains uncalmed. Housing starts and building permits data both released good figures yesterday, stating the quantitative easing programme is consolidating the improvement in the housing market. This hinting a more hawkish tone from Fed’s Chairman in the press conference from today.

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Written by Tom Tong

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