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The Pound made very small gains against the Euro while declining against the Dollar late last week as the Greek debt crisis again takes center stage. Yields on British bonds fell by the most in two months as investors sought the relative safety of government assets. The yield on the 10-Yr gilt tumbled to 2.141% as investors look for “safe-haven” alternatives to EUR denominated assets. The pound rose against the EUR after a report showed that British producer prices climbed at the fastest pace in nine months, suggesting that the BoE is unlikely to ease policy further in the near term.
The Dollar closed last week on a strong note as resurgent fears over European debt keep the dollar well supported in its role as a “safe-haven” currency. Greek authorities signed off on stringent austerity measures that have already incited riots in Athens and public outcry as the measures will cut into the welfare state and weigh heavily on the already struggling economy. However, EU officials signalled that the measures may not be enough to secure a second bailout package that is necessary for Greece to avoid default in the coming months. Meanwhile, US data suggested a slight stalling of the US economy with the trade balance widening more than expected and University of Michigan confidence unexpectedly dropping to 72.5 from 75 in the previous reading. With stocks and commodities taking an early hit and looking to close out the week in the red, the USD will likely remain well supported by the flight to quality.
The Euro remained relatively unchanged against the Pound and the Dollar following the German Finance Minister suggesting that Greece’s new austerity measures are too little too late. In light of the EU comments, deeper spending cuts will likely have to be suggested in the coming days, but with growing social opposition and impending Greek elections, opposition party members have made it clear that they will not approve even deeper cuts. Greek Finance Minister Evangelos Venizelos said it right when he told reporters that the upcoming vote was essentially a decision on whether to remain in the Eurozone or not.
Absorbing massive wage cuts, government downsizing and pension reform is not going to gain popular support, but the alternative is a disorderly default and an exit from the EUR. Neither option is a particularly good one. However, the common currency remains generally supported as investors struggle to find a viable alternative. But the writing may be on the wall with Russia announcing overnight that it would be greatly reducing its EUR denominated FX reserves and replacing them largely with AUD and CAD holdings.
Data released 13th February 2012
No Significant data
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