Foreign Exchange Report : Eurozone Debt Contagion Fears and the Acrimonious Resignation of ECB?s Stark Sends GBP EUR Rate to 6-Month High

Published: Monday, 12 September 2011 07:08 BST - Written by John Cameron

STORY LINK Foreign Exchange Report : Eurozone Debt Contagion Fears and the Acrimonious Resignation of ECB?s Stark Sends GBP EUR Rate to 6-Month High

The Pound Euro exchange rate (GBP EUR) is 1.1681. The Pound Dollar exchange rate (GBP USD) is 1.5837. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5306.

Market participants acted to shift their investments out of Euro-denominated assets as last week’s session in the currency markets drew to a close, taking the GBP EUR exchange rate to above 1.1600 for the first time since 26th May on Friday.

The pronounced move against Europe’s single currency was driven by several factors. Friday’s session saw the unexpected resignation of the European Central Bank’s Chief Economist, Juergen Stark. Stark was specifically responsible for formulating the ECB’s monetary policy and reports suggest that the German policy-maker was so strongly opposed to the ECB’s ongoing purchase of Italian and Spanish bonds that he felt that he could not continue in his role.

Many analysts fear that Stark’s resignation is representative of the deep fissures that exist in the command structure of Europe’s central bank, with German officials tending to be deeply opposed to committing further funds to ’bailing out’ their southern cousins, who German voters view as profligate. Meanwhile, more pragmatic ECB governing council members, including ECB President Jean-Claude Trichet, continue to press for the use of non-conventional monetary policy in order to assist heavily-indebted Eurozone member states.

The Euro’s progress was further hampered on Friday by market rumours suggesting that Greece was only days away from a full-scale default. These whispers caused heavy selling pressure on European banking stocks, due to the extensive exposure of European retail banks to potentially toxic Greek bonds. The sell-off in banking sector shares saw Paris’s Cac 40 index close down by 3.60%, whilst Frankfurt’s Dax registered even greater losses of 4.04% on the day.

Last night saw the GBP EUR pair open at a higher level than Friday’s high and then break the 1.1700 level for the first time since 3rd March, sending out strongly bullish signals for the GBP EUR rate.

The major beneficiary of the Eurozone’s current woes is the US Dollar. With both Japan and Switzerland’s central banks actively intervening in the currency markets in recent weeks in order to weaken the Yen and Franc, the Greenback has re-asserted itself as the global safe-haven currency of choice. If, as futures markets suggest, UK and Eurozone stocks follow the lead set by Tokyo and Hong Kong during last night’s Asian session and head lower, then the EUR USD rate has the potential to break down through the 7-month low of 1.3498 that it registered earlier this morning.


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