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King Warns Europe

King Warns Europe

Mervin King, spoke yesterday to the European parliament, warning that a rise in long term interest rates would have “severe” consequences for economic recovery in Europe. This has been taken as a sign that UK rates could remain on hold for an extended period and has therefore led to Sterling weakness against the Euro.

Other downside risks to Sterling today, Is the release of the UK PMI manufacturing which is expected to decline for a second successive month from 57.1 to 56.3. This is due in part to the indication in the recent CBI retail survey that retailers are expecting to cut back their purchases.

The USD has continued to reach record lows against a basket of currencies, as interest rate differentials remain firmly on the agenda. This was despite a better than anticipated reading for US manufacturing, which suggested that US producers may be benefiting from the week USD.

The Euro zone periphery remains the biggest threat to the recent Euro strength and Dollar weakness. The Greek government is currently trying to renegotiate the terms of its debt, offering a crack down on tax evasion in exchange for an extension to the term of the emergency rescue package. Spain who could still have the biggest say in the sovereign debt crisis have seen poor data recently with an Increase in unemployment to 21%, the highest in Europe and the largest drop in retail sales for two years, this is likely to be a worry for the ECB.

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