Greece gets second chance and UK avoids double dip - Business Works
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Greece gets second chance and UK avoids double dip

Richard Driver of Caxton FX Eurozone finance ministers have finally hammered out an agreement to give Greece a second bailout to the tune of €130bn, in order to bring its debt to GDP ratio down to the 120% mark, which the IMF deems a sustainable level of debt. A March default looks likely to be avoided, but the bailout had been pretty well priced in over the last session or two, so the euro has failed to build on its gains.

The reason for this is because of the plethora of issues and concerns that remain. Certainly the fact that such a long-awaited agreement has surfaced is a positive, but once the dust settled, doubts inevitably arose. Implementation remains the key concern, it’s all very well making promises but Greece has failed to meet targets in the past and the cynics will be forgiven for doubting their ability to deliver this time.

The projections on getting Greek debt levels back on track are based on assumptions, many of which are optimistic. If these assumptions are inaccurate then we are likely to see a third Greek bailout scenario before too long.

Beyond the Greek saga, focus could well turn towards the issue of negative eurozone growth, which will surely weigh on the euro. This is particularly so given the economic traction being seen in the US and most recently the UK.

UK economy may just avoid a double-dip after all

UK growth picked up in January, there’s no doubt about it. The latest relief story from the UK economy is from the retail sector. Against expectations of a 0.3% monthly contraction, retail sales grew by 0.9%, the largest monthly growth since last April’s Royal Wedding activity. The figure represented a real shock and has subsequently sparked hopes that the UK may avoid dipping back in to recession. After Q4 2011’s 0.2% contraction, a positive reading of Q1 growth is necessary.

January’s strong services sector performance, in tandem with this retail spending, bodes well, but UK growth prospects remain shaky. Indeed, the BoE’s quarterly inflation report highlighted short-term uncertainties.

The recent growth figures have given sterling a nudge in the right direction this month, but the BoE’s inflation report has also been helpful in providing a less dovish outlook for UK monetary policy. In addition to the two additional rounds of quantitative easing we have seen in recent moves, the market had been pricing in additional QE this year. With longer-term inflation projections higher than in its last quarterly report and with Mervyn King indicating a satisfaction with the extent of the current programme, market expectations for further QE have been scaled back and sterling has benefited. There remains plenty of scope for further QE (not least if the eurozone crisis deteriorates considerably), but the BoE currently looks likely to stay put for the rest of this year as things stand.

End of week forecast
GBP / EUR 1.19
GBP / USD 1.59
EUR / USD 1.3375
GBP / AUD 1.4650

Sterling is trading at €1.1950, having weathered the improved sentiment towards the debt crisis pretty well. We are looking for a significant upside GBP / EUR move before long. Against the US dollar, sterling is also trading positively, but it looks a good sell at current levels of $1.58. With EUR / USD looking as if it may shift to the downside, GBP / USD will inevitably be dragged with it.

Richard Driver is a Currency Market Analyst with Caxton FX and can be contacted via:

This brief is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Services Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.

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