After England’s demolition (yes I think we can go that far) of Italy at the weekend, the theme continues in the currency markets, with the pound rallying against its euro counterpart, climbing up .70% on the day and briefly touching €1.19.
After a lengthy absence from front page news, the eurozone cracks are finally beginning to re-appear, with a plethora of potential problems hitting the headlines once more.
The lack of news coming recently, coupled with euro strength had more or less duped investors into thinking that they had put the eurozone troubles behind them. This is not the case however, as Ireland and Greece reared their ugly heads with signs that all is not well in their respective camps.
Ireland’s main opposition party, Fine Gael, announced today that they would seek a renegotiation of the international bailout that Ireland received should they be elected on February 25th. Meanwhile Greece, in a sign that they may be struggling to match debt repayments, criticised the IMF and European Union for the stringent terms that were imposed on them.
This comes on the same day that Portugal, (another member of the G.I.P.S.I. family) saw benchmark government debt yields climb to an all time high, above the psychological 7.00% barrier, to 7.37% - a bad sign for the countries borrowing costs. This raises the prospect that the country may yet be forced to appeal for a bailout.
In other news, reports suggested that rescue plans for ailing lender WestLB were under threat, assuring that euro sentiment remained sluggish at best at the beginning of this week.
The main driving force behind the currency markets, EUR/USD, broke below key technical support on this news, and continues to fall with little light at the end of the tunnel in the near term.
A frenetic start then to a busy week – focus has returned to the eurozone with Spanish and Italian bond auctions, and German GDP all still awaited. Meanwhile Britain’s inflation report on Wednesday is looking to overshadow the whole lot as Mervyn King takes the stand.
Edward Knox
Analyst - Caxton FX