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Lack of progress benefits USD

Lack of progress benefits USD

On Friday EU leaders announced a €130bn (1% of EU GDP) plan for growth. This is the only tangible agreement that came out of last week’s heads of state meeting of the big 4 eurozone economies of Germany, France, Italy and Spain. No further details of the growth programme or other measures discussed such as common Eurobond or a financial transactions tax were made available.

But of course this week there is another EU summit which takes place on Thursday and Friday. This gathering is likely to place further pressure on Germany for more ambitious policies to solve the financial crisis as concerns mount over the fragility of the eurozone banking sector. Indeed, Spanish and Italian borrowing costs eased last week aided by market expectations that euro leaders will take more action. Remember the yield on a bond acts as barometers of how the market judges the repayment risk of the bonds issuer.

The recent release of data signalling a slowdown in the global economic recovery and a lack of meaningful progress from policy makers has moved sentiment away from risk. This has benefited the US dollar with GBP/USD slipping through the $1.56 barrier on Friday to a low of $1.5554.

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