Foreign Exchange Outlook : Italian Bond Yields Break Key 7% Level, Bringing Fear to the Markets and Sending Pound Euro Rate to a New 8-Month High

November 10, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Outlook : Italian Bond Yields Break Key 7% Level, Bringing Fear to the Markets and Sending Pound Euro Rate to a New 8-Month High

The Pound Euro exchange rate (GBP EUR) is 1.1738. The Pound Dollar exchange rate (GBP USD) is 1.5916. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5758.

Fear has continued to grip the financial markets in the last 24 hours, as investors fear the worst for the continuance of the Eurozone itself, in its current form.

These concerns were stoked by an increase in the rate of interest that Italy is having to pay in order to service its massive nation debt. The yield on 10 year Italian bonds broke the key psychological 7% level during yesterday’s European session, sending market participants into a spin. A 7% yield on gilts represents a significant barrier, because it is the level at which nations including Ireland and Portugal have been forced to approach the EU/ECB/IMF for emergency bail-out funding.

Meanwhile, the situation has been exacerbated by rumours that the Eurozone’s two major players, France and Germany, are actively considering an alteration to the make-up of the single economic area. This could see several of the 17 current member states jettisoned from the union. Other market whispers suggest that Germany could leave the Euro and let the stragglers sort the mess out for themselves. This provides substantial food for thought for investors currently holding Euro-denominated assets.

The rumours caused Jose Manuel Barroso, the President of the European Commission, to warn of the dangers of splitting the Eurozone, yesterday. He stated that, "the idea that we have two unions in Europe means disunion," lending further credence to the rumours of a division.

Fear over Europe’s ongoing debt crisis took the GBP EUR rate to a new 8-month high of 1.1785 in overnight trading and caused support for the high-yielders to leak, as global stock markets plummeted. However, the Pound is likely to lose ground later today if, as appears possible, the Bank of England Monetary Policy Committee announce an increase to Britain’s Quantitative Easing programme.


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