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EU summit unlikely to change austerity drive

EU summit unlikely to change austerity drive

EU leaders are meeting for a two-day summit in Brussels today to take control and aim to jump-start the economy. EU Parliament chief, Martin Schulz is likely to repeat his warning that an austerity drive may have saved the banks, but at the cost of an entire generation of young people who cannot find a job. He continues to argue that sticking to the EU deficit and debt rules, cutting back budgets and making it easier for companies to hire and fire workers will eventually pay off, even as economic forecasts show a longer-than expected recession in the Euro zone. German finance minister Wolfgang Schaeuble said his government is setting a “positive example” of budget discipline as it plans to reach a zero deficit by 2015. With tax revenues at record highs and borrowing costs at historical lows, Germany stands in stark contrast with most countries in the eurozone.

Meanwhile, the Bank of England will pump more cash into the banking system this year, but not next month, a poll found on Wednesday. It also showed an overwhelming expectation Britain will avoid falling into a third recession in four years this quarter. British manufacturing output fell in January at the fastest pace since June, official data showed on Tuesday, while a wider reading of industrial output, fell 1.2 per cent – more than erasing a December rise. Britain’s economy has been swaying against a government deficit-cutting drive and a struggling euro zone – its main trading partner – while rising unemployment and falling real wages mean consumers have failed to spend enough to revive the economy.

On the FX Markets, for a change, GBP has been the outperformer of the session amid a lack of negative news flow for the UK economy, despite UK press highlighting the gloom of the domestic economy in the wake of yesterday’s industrial and manufacturing production figures. Overnight, stops tripped on the way through 1.4910 provided early support, with downside pressure in EUR/GBP and a spell of short covering in GBP/USD allowing the pair to maintain a 1.49 handle for much of the session. A vanilla option expiry said to be of large size for Friday’s NY cut is helping keep the pair from dwindling too far. UK risk events remain light for the rest of the week, with focus remaining on next Wednesday’s budget from the UK Chancellor Osborne and the Bank of England’s minutes from their March rate decision.

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