Euro Exchange Rate News

The Pound lost some of its recent gains against the Euro

In a day of often contrasting data and sentiment, the pound rose to a two month high against the Australian dollar but gave up some of its recent gains against both the euro and the US dollar.

The Office for National Statistics (ONS) in the UK reported yesterday that the Retail Prices Index, a wider measure of inflation that includes housing costs, was down from 3.9% in January to 3.7% in February. It is clear from the data that the largest downward pressure on the headline rate of inflation came from a fall in the price of domestic electricity and gas, recreation, culture and transport. The CPI came in at 3.4% in February, down from 3.6% in January.

However, the drop was slightly less than expected, with analysts hoping it would come in at 3.3%. This will fuel concerns that inflation could prove a tougher nut to crack than expected over the coming months, particularly given current high oil prices. Dr Howard Archer, chief UK Economist at IHS, said that if consumer price inflation did prove to be sticky over the coming months, this would have worrying implications for UK growth prospects.

“Sticky consumer price inflation would maintain an appreciable squeeze on consumers’ purchasing power and dilute hopes that consumers will increasingly step up their spending as 2012 progresses,” he said.

Today sees the publication of the minutes of the Bank of England’s Monetary Policy Committee minutes of 7 and 8 March and the ONS publish the latest figures for UK Public Sector Borrowing Requirement. Finally, Chancellor George Osborne presents his third budget since the coalition government came to power in 2010. All could be market moving.

Internationally, worries over China’s growth outlook increased demand for the US dollar’s safe haven status and sent the dollar higher against the major currencies yesterday.

The pound rose to a 2 month high against the Australian dollar yesterday on the back of the publication of the minutes of the Reserve Bank of Australia (RBA) meeting from the beginning of March where it held interest rates unchanged at 4.25% for a second consecutive month. Since the autumn of 2011, the RBA have loosened monetary policy due to what it sees as a deterioration of the global economic outlook. Yesterday’s minutes show the RBA continues to closely monitor the global economic outlook but is also aware that a combination of high domestic interest rates and a strong currency is taking its toll on Australian households and the domestic economy.

The euro is steadier as it has slowly moved away from the headlines as Greece continues to complete a series of milestones on its path to recuperation but forthcoming elections could endanger the completion of targets agreed to its second bailout. Yesterday, the Greek government sold €1.3 billion of 3-month Treasury bills with borrowing costs backing down as demand remained stable. Specifically, the auction’s bid-cover ratio came in at 2.69, compared to February’s 2.7 with the yield dropped 36 basis points to 4.25%.

Another milestone was also passed on Monday as the International Swaps and Derivatives Association (ISDA) closed the books on the CDS (credit default swaps) pay-out as Greece completed the exchange of €177.2 billion in debt with private creditors taking a “voluntary” 53.5% haircut, the ISDA declared the swap a credit event and ordered the default insurance to be paid. Yesterday’s auction set the recovery rate on the exchanged debt at 21.5%, meaning that investors holding CDS would receive 78.5% of their investment in compensation. CDS holders are estimated to be paid somewhere over €2.5 billion. Meanwhile, data released yesterday showed that the country continues to struggle to overcome a recession that should enter its fifth consecutive year in 2012 with the economy expected to contract a further 4.5%. It is also feared that the unemployment rate will rise over 19%.

An unwelcome increase in political instability is sure to come as Greece is due to hold general elections on either 29 April or 6 May. This despite the fact that the coalition government and main opposition parties all signed letters of compromise wherein they promised to fulfil obligations that formed part of the second bailout.

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