GBP EUR Exchange Rate Hits 2-Month High On Cyprus Bank Fears

Published: Thursday, 28 March 2013 09:00 BST - Written by John Cameron

STORY LINK GBP EUR Exchange Rate Hits 2-Month High On Cyprus Bank Fears

The Pound climbed to its highest level against the euro since 24th January during yesterday’s session, as market participants braced themselves for today’s brief re-opening of Cyprus’s High Street banks. Fears over the reaction of Cypriot savers as the tiny island state’s banks open their doors for the first time in ten days weakened the single currency yesterday, propelling the Pound to euro exchange rate (currency : GBP EUR) all the way up to 1.1853. Cypriots holding funds in the nation’s banks will be limited to withdrawals of €300 per day when the island’s banks open for six hours. Cypriot policymakers hope that this will be enough to prevent an all-out run on the troubled state’s banking sector from customers attempting to avoid the EU/ECB/IMF’s hefty levy which came as an attendant condition of last weekend’s bailout.

The market traditionally dislikes any kind of social disorder, so if this morning’s re-opening of bank branches in the eurozone’s latest ‘bailout nation’ dissolves into violence, then the single currency could potentially incur further losses against Sterling. With Cyprus’s police force and army on high alert, this would appear to be a distinct possibility. Investors holding euros will be nervously awaiting 1000hrs GMT this morning – the time when the debt-addled Mediterranean state’s banks are set to open their doors.

Elsewhere, yesterday’s session brought bad news for the UK’s already under-pressure banking sector, as the Bank of England announced plans to force British banks to raise an additional £25bn in liquid capital by the end of this year. The additional funds will be used as a ‘buffer’ to help decrease the chances of any UK banks failing in the way that Northern Rock, Bank of Scotland and others did in the wake of the 2007 contraction in the global credit markets. With Britain’s banks already facing major holes in their balance sheets thanks to the effects of the credit crunch and the billions of Pounds which they have had to pay out over the past two years following the mis-selling of payment protection products, the fear exists that the BoE’s new edict will cause UK banks to hoard cash instead of lending it to private individuals and UK businesses. This is an unwelcome prospect for the British economy and the Pound alike.

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