EURO-ZONE 750Bn AID PACKAGE AGREED
The Euro pared the sharp decline from the previous week and rallied to a high of 1.3086 during the overnight trade as policy makers in the region announced a EUR 750B rescue package to support the economies operating under the fixed-exchange rate system.
At the same time, the European Central Bank announced that it will intervene in the market for government and private bonds in order “to ensure depth and liquidity in those market segments which are dysfunctional,” while the Bundesbank said it will start purchasing government bonds today.
According to the details of the aid plan, governments in Europe will make EUR 440B available for the ailing economies, with an additional EUR 60B coming from the European Union’s budget, while the International Monetary Fund will provide as much as EUR 250B in funding as government officials struggle to bring their public finances back in-line with the stability pact. In addition, the Federal Reserve announced that it will reinstate its currency-swap lines with its major counterparts as the Greek crisis weighs on the global financial system, and said that it will provide the “full allotment” of U.S. dollars through January 2011. Nevertheless, the economic docket showed Germany’s trade surplus widened to EUR 17.2B in March from a revised EUR 12.7B in the previous month to top forecasts for a rise to EUR 14.0B, led by a 10.7% jump in exports, while the Sentix investor confidence survey for the Euro-Zone weakened more-than-expected in May, with the index slipping to -6.4 from 2.5 in April. As global policy makers take unprecedented steps to support the financial system, the efforts should help to alleviate the downward pressures on market sentiment however, the new measures may only provide a short-term relief as the ECB expects to see an uneven recovery this year.
The British Pound halted the six-day decline and advanced to a high of 1.5029 following the Bank of England interest rate decision as the central bank held the benchmark interest rate at 0.50% and maintained its asset purchase target at GBP 200B. Nevertheless, the BoE is scheduled to release its Quarterly Inflation Report on Wednesday at 9:30 GMT, and a shift in the central bank’s economic assessment is likely to spark increased volatility in the exchange rate as investors weigh the prospects for future policy. Government officials in the U.K. may highlight the stickiness in consumer prices as inflation exceeded the central bank’s upper limit of 3% for the second-time this year, and the British Pound may push higher over the week if BoE Governor Mervyn King no longer expects price pressures to drop below the 2% and drops his highly dovish bias for price growth.
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Tom Trevorrow Senior Trader TOR FX
NEWS FLASH
NEWS FLASH – Pound rallies in anticipation of a Lib Dem/Conservative coalition government
GBPEUR/GBPUSD
The Pound has dropped 4% against the Euro since the close of trading last night, while the UK currency has slumped to the lowest level in over a year versus the U.S Dollar, amid a combination of extreme volatility in financial markets and the political uncertainty surrounding the result of the General Election.
Britain officially has a hung parliament for the first time since 1974, with the Conservative Party recording the largest majority. Gordon Brown has indicated that Labour was seeking a coalition government with the Liberal Democrats, but the leader Nick Clegg has said this morning that the Conservatives should get the first chance to form a coalition.
The Pound has been in free-fall against majors this morning and the level of volatility is unlikely to subside until a sustainable government is in place. However, Clegg’s admission that he would prefer to discuss a pact with the Conservatives is somewhat of a surprise and may provide some stability to the foreign exchange market.
Market Analysis by Adam Solomon
