The euro remains under considerable pressure after Greece failed to reach an agreement on the terms of its financial bailout and Italy suffered a ratings downgrade.
The euro suffered throughout Monday in intense trading on growing unease about a potential Greece default and the impact that would have on the wider euro-zone economies. News that German industrial giant is reputed to have withdrawn up to €6 billion previously on deposit with a French bank and moved the funds across to an account at the European Central bank (ECB) did little to calm nerves.
Talks between Greece and its creditors resume today and markets will be watching closely for any progress made.
In a fresh blow to the debt-stricken euro zone, ratings agency Standard & Poor’s (S&P) downgraded its rating on Italian sovereign debt by one notch on Monday night, citing poor economic growth and a “fragile governing coalition”. While still considered investment grade debt, the rating was cut from A+ to A. S&P has maintained its outlook as negative, a stance it has taken since May.
The dollar rose across the board on its safe haven appeal.
The pound made progress against the euro but fell against the dollar on nerves that the Bank of England (BoE) will introduce further stimulus measures to kick-start the sluggish UK economy.
Meanwhile, in its latest quarterly bulletin, the BoE argues that the economic effects of its first round of quantitative easing (QE) were ‘economically significant.’
Thus, a range of different analytical approaches suggest a peak effect on the level of real GDP of up to 2% along with a peak effect on annual CPI inflation of up to 1.5%.
Commenting on the data after it came out, economists at Barclays are of the opinion that, “Overall, this is a GBP negative, as markets will assign a higher probability of further QE at the 6 October MPC meeting, even if the article was not part of the BoE’s communication strategy. Taken is isolation, we would suggest fading any short-term decline in the GBP as a result of the article’s publication. However, given the deteriorating economic environment in Europe, the weaker macro outlook in the UK and the potential for further fiscal drag, this is not a time to fade GBP weakness.”
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
