The Euro continued its slide in early trading this morning following on from the three cent reversal on Friday afternoon. The market was awash with rumours of an imminent default by Greece and trying to understand the ramifications of the resignation of Juergen Stark, the top German official at the ECB. The Hellenic Republic did not announce a default over the weekend, but they did announce fresh austerity measures in a last ditch attempt to meet the strict budget targets set by the EU for 2011. The departure of Mr Stark from the ECB is very worrying from a credibility point of view. The ECB has been reasonably successful at managing the sovereign debt crisis by preventing a bond market rout. His resignation because of opposition to the ECB bond buying program certainly questions the ECB’s credibility and is being reflected in the price of the Euro. The size of the move to what at first glance, looks to be reasonably speculative is because the Euro has lost what has been propping it up; higher interest rates. The dovish ECB press conference on Thursday took out lots of buying support for the Euro, paving the way for a large move which is continuing in early European trading.
On the back of the Euro move, Sterling has done well against the single currency, rising above 1.15 and towards 1.16 on the inter-bank market. The Pound will have a busy week, with UK CPI and Jobless Claims due on Tuesday and Wednesday respectively, and it will continue to be pushed around by developments on both sides of the Atlantic. This morning also saw the ICB report of the planned changes in the UK banking industry. The main proposals are as most in the markets thought, the ring fencing of the retail operations of banks (savings, loans etc the “utility” part of the bank) from the wholesale division (or what Vince Cable the “casino” operation). The planned separation is expected to cost several Billion Pounds per annum through higher funding costs and would be full passed through to consumers. The changes will probably take several years to implement and will hopefully be part of other regulatory changes to be announced over the coming year.
The Dollar has been the main beneficiary from the Euro reversal over the last few days. With stock markets opening lower this morning the USD will keep its strength until America opens this afternoon. Wednesday sees the release of US Advance Retail Sales and on Friday the U of M confidence survey.
