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Foreign Exchange Currency Report : Euro Slumps on Rumours That Greece is Set to Leave Single Currency

May 9, 2011 - Written by John Cameron

The Pound Euro exchange rate is 1.1387. The Pound Dollar exchange rate is 1.6395.

The old market adage ‘buy on the rumour, sell on the fact’, was more pertinent than ever during last Friday’s session as the Euro suffered heavy losses against the other majors as market whispers circulated which suggested that Greece was set to leave the single currency.

The rumour regarding Greece’s exit emanated form an article which appeared in the German publication Der Spiegel on Friday morning. The story stated that German policy-makers had been warned that Greece is considering withdrawing from the single currency, due to its continued difficulties in meeting the terms of its bail-out.

The Greek Finance Ministry was quick to refute the claims and German and French officials also moved to scotch the rumour, however by this time, the damage had been done, with the GBP/EUR rate climbing off its Thursday low of 1.1059 to close the week at 1.1431.

This was a massive move for GBP/EUR, which was accentuated by several other contributing factors; firstly, it should be noted that Thursday’s low of 1.1059 for GBP/EUR was the lowest that this pair has traded down to since March 2010, leaving it ripe for a technical pull-back.

Another key point to note regarding the Euro is that until Thursday lunchtime, although the markets were aware of potential sovereign debt problems in the Eurozone, investors were willing to put these fears to the back of their minds and instead concentrate on the higher expected future yields for Euro-denominated assets. However, the uncharacteristically dovish tone of ECB President Jean Claude Trichet’s press conference on Thursday afternoon and his references to the desirability of a weaker Dollar in order to promote the global recovery have decreased analysts’ expectations for future ECB interest rate hikes during the remainder of 2011.

The Euro has pared some of its Friday losses during early trading in this week’s session, with the ECB taking action over the weekend to ease the terms of Ireland’s bail-out. This action by Europe’s Central Bank has emphasised the Eurozone’s determination to embrace and assist so-called ’peripheral states’. However, with the ECB taking a less hawkish stance on monetary policy and more shocks in store over coming months regarding Eurozone states’ sovereign debts, a run against the Euro can not be ruled out.
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