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GBP down against EUR but up vs AUD and NZD

GBP down against EUR but up vs AUD and NZD

It was another day of turmoil in the markets yesterday as fears over the drag on global growth from the struggling Eurozone nations, and the seemingly ad hoc way that financial regulation is being introduced, has caused panic. Global confidence has not been helped by various German politician’s comments over the dire threat the recent crisis poses for the Euro, although with the German parliament due to vote on their participation in the bailout deal, the comments are intended to scare a domestic audience into action, not change investor behaviour. As the potential scope of the Eurozone problems has started to spread beyond Europe’s borders, the focus has actually switched away from the Euro a little, and along with rumours of a direct intervention by the ECB to support the Euro, the single currency has remarkably performed quite well. Overnight the Euro has picked up to above 1.2650 against the Dollar, although the markets have obviously decided that the move was a bit excessive, and it has come back to hover around 1.25; while the Pound has had a similarly volatile night, dipping to below 1.14, before recovering to hover around 1.15 this morning.

The fears are that the global recovery isn’t strong enough to shrug off a faltering Eurozone, and those fears were stoked when yesterday’s US jobless figures came in unexpectedly high. Stock markets have responded in the usual fashion, with the S&P500 falling by 3.9% it’s biggest one day fall for quite a while, and taking it’s drop from mid April to 12%. The nature of the regulation coming into both Europe and the US is spooking the markets, especially as after months if not years of talking about the need for a multilateral approach, Germany have decided unilaterally to stop naked short selling, and judging by the interviews given by their finance minister, they are looking at reducing the amount of speculative activity in general; across the Pond the Senate and House bills are likely to be combined to produce the largest change in regulation since the 1930s. The US are looking to strip the speculative arm of banks away from the deposit taking branches, and to also have all deals normally done interbank, to be cleared through an exchange. Lehman Brother’s wasn’t a commercial bank, and that still caused massive problems, so it’s hard to know what effect some of the regulations will have, although they do play well to the gallery. The Pound has been trading against the Dollar in a range between 1.4250 and 1.4450 over the last couple of days, and it is currently towards the top of that range hovering just above 1.44.

One currency the Pound has done extremely well against is the Australian Dollar. As the fears that Eurozone growth will weigh on global growth have increased, the Australian Dollar has receded. The recent trend in Australia has been for higher rates, and even last month there was talk of further rate rises over the rest of the year, however there has been a sudden shift with some less than optimistic data, reversing the previous assumptions and there is now even talk of a rate cut, with the markets pricing in a 12% chance. The Pound has sharply rallied against the Australian Dollar hitting 1.7750 overnight, although it has dropped back to around 1.7450, and it looks like the volatility is going to continue.

We have some data out today that might reassure the markets that things are all that bad, first of all the UK public sector borrowing is slightly better than expected, although it was expected to be awful, so that’s not all good news. While Eurozone purchase managers index have shown the service sector growing, although the news isn’t so good on factories. There is also the German vote for the bailout bill, and the EU minister meeting likely to produce some further steps to calm the crisis, so the volatile times are likely to continue, at least for the short term. At least we are getting the first taste summer weather.

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