Euro remains under pressure as contagion risks spreading to Slovenia

Tom Tong28/Mar/2013Currency Updates

GBP

The British pound continued to gain back losses from earlier in the month as the Bank of England (BoE) warned commercial banks in the U.K. will need to come up with GBP 25B in fresh capital by the end of the year in order to insulate the economy from future shocks.
At the same time, the final Q4 GDP report confirmed the 0.3% decline in the growth rate, and also showed a 0.1% contraction in disposable incomes, which puts the BoE in an even tougher position as above-target inflation continues to sap purchasing power for British citizen.

As the British economy struggles to emerge from the double-dip recession, we should see the Monetary Policy Committee enhance its accommodative policy stance in 2013, therefore its likely to observe a growing number of BoE officials adopt a more dovish tone for monetary policy as the central bank sees a slow recovery ahead.

EUR

The euro tumbled to a fresh yearly low as economic confidence in Europe weakened more-than-expected during the month of March, and the single currency may face additional headwinds over the near to medium-term as fears of a deepening recession along with the renewed threat for contagion drags on the exchange rate. Eurostoxx 50, the biggest European stocks index, dropped 1.09%.

Although the EU argued that the Cyprus bailout ‘is not a template’ for the euro-area, former Bundesbank President Axel Weber warned the ‘impact on the Cypriot economy is going to be huge,’ and argued that ‘banks will become even more dependent on ECB liquidity because deposits will be largely drained.’

At the same time, it seems as though Slovenia could be next in line to request external assistance as Prime Minister Alenka Bratusek warns that public finances in the region remain in ‘bad shape,’ and the renewed threat for contagion may continue to dampen the appeal of the single currency as European policy makers maintain a reactionary approach in addressing the risks surrounding the region.

USD

The USD Index rose aggressively after a spate of risk aversion dominated the markets, this was reflected in US stocks as S&P 500, Nasdaq and Dow Jones closed flat despite the improved economic sentiment in the US, as concerns of world growth expectations are decreasing.

Pending home sales dropped by 0.4% in the US during the month of February. They were expected to drop by 0.3% after rising 3.8% last month, worse than expected but generally speaking, the housing market in the US is still recovering strongly compared to its European counterparts.

Their is a mix of macroeconomic data for the US today is the Core Personal Consumption Expenditures (QoQ) (Q4) with a consensus expectation of 0.9% the same 0.9% as previous. Finally we have the GDP Price Index being released with Initial Jobless Claims expected to improve marginally this month. After months of relevant improvement in macro data in the US, this 4Q GDP is strongly expected to show a better than expected figure, and the US dollar will be the main beneficiary of a positive release.

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Written by Tom Tong

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