Curency Update – Wednesday 26th May

Curency Update – Wednesday 26th May

As if the problems with Eurozone debt and growth, along with the impositions of patchy banking regulations across the globe, weren't enough to give the markets the jitters, now the tension between North and South Korea are adding to the  volatile mix. After an international investigation accused North Korea of sinking a South Korean warship, killing 46 sailors, the tension has been rising, with all diplomatic ties, although there weren't much to begin with, having been severed. As a peace agreement was never signed, both countries have been officially at war since the 1950's, however there had been some signs of rapprochement recently, which have been squashed by the recent hostilities. North Korea is a nuclear capable state and the tension added to a volatile day on the stock markets, with the Asian markets leading the way, as you would expect with their proximity, falling around 3%,  followed by Europe, and then by the US, as the S&P fell by 3%, before a dramatic turnaround allowed the market to finish flat.

Korea wasn't the only issue pressing the markets however, fears that Germany would extend their short selling ban to all stocks, as they said they were considering, have also caused some unease, and the focus on the Eurozone debt problem has shifted to Spain, with the recent bailout of a Spanish bank, as well as planned €20bn of spending cuts. The Euro dipped down to below 1.22 against the Dollar yesterday, although it has recovered a little, alongside the US stock markets, to sit around 1.23. The Pound stayed relatively steady against the Euro holding in a range around 1.1650 and 1.17.

The Pound actually got some good news with the GDP estimate for Q1 raised from 0.2% to 0.3%, based largely on a rise in manufacturing output, although a fair bit of this came from stock rebuilding. There was also the Queen's speech yesterday, which set out the coalition government's legislative agenda, however it will be the government's spending plans which will be of interest to the markets, so all the pomp and ceremony was lost on them. The GDP revision failed to give the Pound much support in the current stormy markets and as the panic set hold in the markets yesterday, the Pound dipped down to almost 1.4250, although it has recovered since to sit around 1.44.

It's a quiet day for data, with just US durable goods orders, and new home sales to set the agenda. US Treasury Secretary Geithner, is in the UK today and will present a joint press conference with Chancellor Osbourne this afternoon. they will no doubt be questioned on their attitudes to the Eurozone problems, and on banking regulation. The FX markets are likely to stay roughly rangebound as the recent flight from risk seems to have paused after good US consumer confidence figures helped halt the slide of stocks yesterday, so the markets are likely waiting to see where the next piece of significant economic data takes them.

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