Foreign Exchange Rates - Pounds to Euros, Eurozone Sovereign Debt Concerns Take GBP EUR Rate Higher

15 Apr 2011 at 11 AM - Written by John Cameron

STORY LINK Foreign Exchange Rates - Pounds to Euros, Eurozone Sovereign Debt Concerns Take GBP EUR Rate Higher

The Pound Euro exchange rate (GBP EUR) is 1.1320. The Pound Dollar exchange rate (GBP USD) is 1.6363.

Any thoughts that the recent agreement by EU Leaders on the terms of a bail-out for Portugal would draw a line under the Eurozone Sovereign Debt crisis were put to one side yesterday, as Greek debt spreads soared.

At one point, the yield that Greece’s government pays on its 2 year Treasury Bills rose to a record 18.4%, as investors grew increasingly fearful that Greece may be forced to renegotiate the term of its borrowing. Some analysts have predicted that this will cause Greece to default on some or all of its national debt commitments, causing the single economic area to plunge into crisis.

Spanish and Portuguese debt spreads also rose yesterday, as fear of debt contagion in the single economic area grew. The combined effect of the renewed sovereign debt worries has been positive for the GBP EUR exchange rate, which rallied from a six month low of 1.120 on Wednesday to trade as high as 1.1353 during yesterday’s session.

Elsewhere, China released a slew of key economic data during last night’s Asian session. The real headline grabber amongst these figures was the annualised CPI Inflation figure, which showed that prices are rising by an annualised 5.4%, a figure which was higher than the expected 5.2% level and significantly above February’s figure of 4.9%. A key component of the price rise was food inflation. The official figures showed that food prices are rising at a year-on-year rate of almost 12%; Chinese policy makers dropped heavy hints that they consider these price rises to be untenable in the medium term.

The fact that figures last night also showed that the Chinese economy is growing at a better-than-anticipated 9.7% and that retail sales remain strong, gives the People’s Bank of China the scope to further increase interest rates. This is an action which now appears highly likely.

If China does move to tighten monetary policy and allow the Yuan to further strengthen, many economists fear that the global economic recovery may be placed in jeopardy. These concerns, along with the continuing Eurozone Sovereign Debt Crisis, have caused a downward move in Asian equities overnight. If this dip in appetite for risk continues in this afternoon’s North American session, then the Dollar may benefit from safe haven support, causing the GBP USD rate to retrace further down from yesterday’s high of 1.6385.

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