Currency Exchange Report - GBP EUR Reversal as European Focus Shifts to US Debt Ceiling Talks, USD Hesitates

July 25, 2011 - Written by John Cameron

STORY LINK Currency Exchange Report - GBP EUR Reversal as European Focus Shifts to US Debt Ceiling Talks, USD Hesitates

The Pound Euro exchange rate (GBP EUR) is 1.1343. The Pound Dollar exchange rate (GBP USD) is 1.6271. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5062.

Markets seem to be breathing a sigh of relief following the announcement of measures aimed at maintaining stability in the Eurozone. The EU summit last week saw a sovereign debt deal with measures to bail out Greece (€109 Bn) and lower Irish debt payments from 5.5% to 2.5%, saving up to €800 in interest repayments. The Euro has seen remarkable strength in the wake of summit talks as confidence returns and risk appetite gains.

The Euro has managed to open and hold position above 1.43 against the dollar despite an announcement from Moody’s that it was cutting the Greek’s debt rating by three notches, they went on to comment that the likelihood of a Greek default was now close to 100%. The dollar has failed to capitalise on the news as US policymakers have still yet to come to an agreement on raising the US debt ceiling. The August 2nd deadline is rapidly approaching and will continue to unsettle markets in the short term.

It is highly likely that a successful outcome will be reached and we would therefore expect risk appetite to gain further in the coming weeks. The recent US dollar strength attributable to risk aversion is therefore likely now to be followed by a round of dollar weakness.

The week ahead sees a busy schedule for the majors with the first estimate of Q2 US GDP, Consumer Confidence, Chicago PMI, Case Shiller House Price Index and Fed Beige Book from the US. The Eurozone has Flash HICP, German CPI, and Belgium Q2 GDP. From the UK we have Q2 GDP, monthly house price surveys and consumer confidence.

Despite the pickup in risk appetite the pound will probably continue to suffer on an anaemic outlook for economic growth. Consensus forecasts show an expected 0.2% GDP growth rate for Tuesdays release, down from 0.5% in Q1. If this is the case, this will reinforce the view that interest rate policy will remain extremely dovish and that there will be no change in interest rates until the mid part of 2012 at the earliest.

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