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Morning Foreign Currency Market Outlook - GBP/EUR Exchange Rate Edges Higher as the Euro Comes Under Pressure Ahead of EU Sovereign Debt Summit

March 24, 2011 - Written by John Cameron

The Pound Euro exchange rate (GBP/EUR) is 1.1529. The Euro Dollar exchange rate (EUR/USD) is 1.4072.

Concerns over widespread Eurozone sovereign debt problems are dominating currency market movements this morning, following the resignation of Portuguese Prime Minister Jose Socrates late last night.

Socrates stepped down after all five Portuguese opposition parties acted in unison to vote down his ruling party’s proposed austerity budget in parliament. This makes it highly likely that Portugal will have to follow Greece and Ireland in accepting an emergency bailout from the EU’s Emergency Financial Stability Fund.

Eurozone leaders begin a 48 hour summit in Brussels today as Portuguese 10 year Treasury Bill spreads hit record levels. The Portuguese situation provides a far from ideal backdrop to the summit, which aims to establish a consensus from the seventeen leaders on how to tackle mounting EU sovereign debts. In previous discussions, richer Northern European states, (in particular Germany), have proved reluctant to provide support for struggling nations, (largely situated in Southern Europe). Any re-opening of such political fissures could prove harmful to the Euro.

Turning to the UK, yesterday morning’s Minutes from the most recent Bank of England MPC meeting showed that once again only three of the nine-man committee voted for an increase in interest rates. With long-time hawk, Andrew Sentence, due to relinquish his position on the committee in early summer, the prospects for a near-term UK rate increase appear dim. The Minutes went on to re-iterate the committee’s belief that UK inflation will move lower ‘in the medium term‘.

Later yesterday, UK Chancellor of the Exchequer, George Osborne, delivered his Budget statement to Parliament. A suspension of the increase in fuel duty and proposed simplifications to the taxation system stole the headlines, but the key statistic which caught analysts’ attention was the government’s downgrading of their GDP growth forecast for 2011 from 2.1% to 1.7%. The Chancellor also announced that the 2012 growth forecast was downgraded from 2.6% to 2.5%.

The GBP/EUR rate edged downwards immediately after the release of the BoE Minutes to touch 1.1461, close to Tuesday’s low of 1.1455. The pair went on to recover some ground but still closed below Tuesday’s finishing level. Any Euro-negative news from Brussels today could see the pair head back towards the pivotal 1.16 resistance level.
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