Yesterday’s European summit has gone the way that most commentators thought; no real concrete political or economic action but a statement of will and resolve to have something done by this Wednesday’s meeting. Even so, the noises coming from the gathering has led investors to keep buying in the belief that a resolution will be found soon enough. But with EURUSD and GBPUSD hitting 1.39 and 1.60 respectively you would think that a breakthrough had been made already. Unfortunately for all parties concerned that is not the case.
German Chancellor Merkel stated yesterday that decisions will not be made until Wednesday and that these will not be the last step as more will be needed on growth and fiscal discipline. EU finance ministers have however reportedly decided that banks should be subject to a 9% core tier 1 capital ratio and would have until 30 June 2012 to reach the target level, during which the banks would be subject to limits on bonuses and dividend payments.
The matter that doesn’t seem to have been decided is that of how much of a haircut private sector individuals will have to take on their holdings of Greek debt. The EU/ECB/IMF troika reported on Greece on Friday stating that for Greece’s debt to GDP ratio to be brought down to 120% by 2020 then a cut of 50% would be needed; 60% would be advisable if the level was needed to fall below 120%. It currently stands at roughly 145%. The next tranche of aid has been released by EU finance ministers and is due to hit the Greek coffers by early November.
It wasn’t all roses for the EU over the weekend however with S&P saying that a double-dip recession in Europe would likely lead it to downgrade by “one or two notches” the ratings of France, Spain, Italy, Ireland and Portugal.
Given that Wednesday is now the new deadline we suspect that markets will trade in a similar fashion to how they traded before this weekend; volatile with pre-described ranges with large headline risks floating out there. For GBPEUR that is a range it seems of about 1.14-1.17 whilst GBPUSD seems happy above 1.57 for the moment and will be looking to push higher over the course of the next few sessions.
Data wise today we have a slew of preliminary and advance PMI numbers from the EU that are set to show steep falls in the manufacturing and services industries. Industrial new orders are also expected to slow to a crawl for the month of August further heightening fears that the EU is set for another flirtation with recession.
Latest exchange rates at time of writing
| Indicative Rates | Sell | Buy |
| GBPEUR | 1.1476 | 1.1503 |
| GBPUSD | 1.5951 | 1.5975 |
| EURUSD | 1.3883 | 1.3409 |
| GBPJPY | 121.61 | 121.88 |
| GBPAUD | 1.5334 | 1.5362 |
| GBPNZD | 1.9812 | 1.9838 |
| GBPCAD | 1.6042 | 1.6071 |
| NZDUSD | 0.8042 | 0.8064 |
| GBPZAR | 12.72 | 12.77 |
| USDZAR | 7.9688 | 8.0034 |