gbp fundamentals

Euro, British Rebound as EU Summit Focuses On Debt Guarantees, UK Buys Majority Stakes in RBS, HBOS

Monday, 13 October 2008 22:31:04 GMT  |  Terri Belkas, Currency Strategist

The euro and British pound rebounded when trading resumed on Sunday, as the European Central Bank, Bank of England and Swiss National Bank said they were ready to inject as much as needed into the markets for US dollar funding in a coordinated effort with the Federal Reserve.

Furthermore, the EU’s summit in Paris concluded with a statement signaling the implementation of other measures meant to stabilize the markets, including arrangements where individual governments would guarantee some types of new medium term debt (up to 5 years) issued by banks. The statement also brought up the issue of recapitalization, an idea that is now starting to gain traction European countries like Spain, Italy, Germany and France now that it has been implemented in the UK. In fact, the British government announced that they would buy majority stakes in Royal Bank of Scotland Group (RBS) and HBOS. The news also triggered massive gains for foreign stock markets, as Germany’s DAX Index jumped 11 percent, the sharpest gain since the index was created in 1988, while the FTSE 100 gained 8.3 percent as all but six stocks rose.

Looking ahead, trading of the euro and British pound will continue to depend greatly upon risk sentiment in the markets, with risk aversion working out of favor for the currencies since the US dollar has recently generated demand as a “safe-haven” instrument. On Tuesday, the euro faces event risk from a scheduled speech by ECB President Trichet, who will give the keynote address at a meeting of The Economic Club of New York. Meanwhile, the British pound could see volatility on the release of UK CPI, as annual inflation growth is anticipated to accelerate to a rate of 5.0 percent. The BOE has said in the past that they expect CPI to breach the 5.0 percent level in coming months, but these expectations did not stop them from cutting rates on October 8 by 50bps to 4.50 percent in a coordinated effort with the Fed and ECB, among other central banks. Indeed, the credit crisis and the sharp economic slowdown in the UK have taken the spotlight from inflation fears, but if UK CPI proves to be even stronger than forecasts, the British pound could rise. On the other hand, a weaker-than-expected result could spark GBP/USD selling. Overall, my bias for the euro and British pound this week remains cautiously bullish, as we’re likely to see retracements throughout the financial markets of the sharp moves experienced over the past two weeks.

Related Article: 5 Key Events for the Forex Market This Week 10-12-08, Euro Weekly Forecast, British Pound Weekly Forecast


Check out Daily Fundamentals in its entirety for analysis and outlooks on the US dollar, euro, British pound, Japanese yen, and the commodity dollars.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars