The pound made a solid start to the trading week against the euro reaching a 6 month high but fell away in the afternoon after the euro staged a late rally following a report in the Financial Times (FT) that China will be making a ‘significant’ investment in Italian bonds.
Trading was highly volatile on Monday. The euro opened sharply down in early trading on fears that Moody’s Investors Service could downgrade French banks such as Societe Generale on concern about their exposure to Greece. There are growing fears that Greece is on the edge of default.
The FT reported that officials from the sovereign wealth fund China Investment Corp visited Rome last week for talks with finance minister Giulio Tremonti. The fact that the third largest economy in the euro zone is going ‘cap in hand’ to Asia for support underlines just how serious the euro zone’s difficulties are. Whilst the European Central Bank (ECB) is currently buying bonds from its crippled members, the programme cannot continue indefinitely forcing policy makers to look beyond their own shores for assistance.
Investors continue to believe that a Greek default is all but inevitable, with serious worries also over the ability of Spain and Portugal to pay their debts. Italy is next on the “trouble” list, and even France is coming under market scrutiny.
The timing of the Chinese visit is no coincidence as Italy holds a bond auction later today and is attempting to raise around €7 billion.
The pound is likely to remain under pressure itself this week due to the wealth of data out over the next few days. The Royal Institution of Chartered Surveyors (Rics) reported yesterday that fourteen homes were sold per estate agent in the UK in the three months to August, the lowest total for more than two years. It cited economic uncertainty and a lack of mortgage lending led to the sluggish housing market as the main factors.
Today sees the publication of trade balance and inflation data in the UK and over the next few days we also get the latest unemployment data and retail sales figures. None of this data is likely to point towards an economic recovery in the UK and is thus likely to keep the pound under the cosh.
The economic uncertainty continues to drive ‘risk aversion’. This helped push the US dollar to a nine month high against the pound and a seven month high against the euro.
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.”
