YB Currency Update – Tuesday 23rd February

YB Currency Update – Tuesday 23rd February

The markets stayed remarkably steady yesterday with no important data releases to react to. There was a few comments from central bankers for the markets to take a look at, with the Fed once again trying to ease fears that the recent rise in the discount rate was anything more than a gradual return to normal liquidity. Fed Member Janet Yellen said that 'the (US) economy will continue to operate well below it's potential throughout this year and next.' Yellen followed that with comments that now is not the time to be tightening interest rate policy, and the economy is still in need of extraordinary low rates. It seems the repeated reassurances from the Fed are starting to have some effect, at least on the Dollar, which has started to give up some of last week's dramatic climb. The Dollar has allowed the Pound to push back up to around, 1.5550, while even the under pressure Euro has managed to push up to almost 1.37 against the US currency.

The rumours of a Eurozone, German led, bailout of Greece, which surfaced over the weekend, seem to be weaker than first reported. It has been pointed out that with German banks owning around €522bn of Greek sovereign debt, the German state would certainly have an interest in Greece's financial health, but an ECB member said that the story of a €20-€25bn rescue package was overblown, and any package that was put together, and he admitted a possibility, is likely to be less than the reported amounts. Apropos of nothing, the ECB member also helpfully pointed out that Italy's long term debt was cheaper than the UK. We have just seen the release of the German business climate survey, and the current business indicators are slightly weaker than forecast, while the expectations element is slightly better. The survey has weakened the Euro slightly, but only slightly. so the Pound still finds itself hovering around the same range as yesterday, between 1.1350 and 1.14.

Once again there is little out for the rest of today, so once again the markets will be watching a central banker speak. This time it the UK's turn and Mervyn King has already started the speech and it should come as no surprise that the Pound has started to slip. Governor King has started by distancing the UK economies problems, from the seemingly similar problems in Greece, while also acknowledging the size of the UK deficit, although he thinks that the chances of a rating's downgrade to the UK is remote. What has really hurt the Pound is King's comments that the decision not to extend QE was 'very finely balanced', in spite of the 9-0 unanimous decision, and he has said that the decision to extend QE will be revisited in future meetings, with the performance of the economy going forward will help decide. King's comments have caused a sharp drop in the Pound, leaving it around 1.5450 against the Dollar, and around 1.1325 against the Euro, with little else released today the Pound is likely to be on the back foot.

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