IMF boosts emergency fund, but EUR remains pressurised - Business Works
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IMF boosts emergency fund, but EUR remains pressurised

Richard Driver of Caxton FX The weekends IMF and G20 meetings produced some real progress in the form of a combined $430bn of additional loans, to be used in the event of a deterioration of the eurozone debt crisis. Good news then, but Spanish 10-year bond yields are trading up above the dangerous 6.00% level, and Italys equivalent debt is yielding 5.75% today, so it clear that the market remains characteristically sceptical.

The French presidential elections have increased the pressure being felt by the euro in recent sessions. Socialist candidate Francois Hollande received the most votes in the weekends initial round of voting and the euro, as well as European equities, has declined as a result. The final election will be held on May 6th and this political uncertainty is likely to weigh on the single currency in the meantime. The markets would probably prefer Sarkozy to remain in power, thus reducing the risk of a breakdown in cooperation between France and Germany on dealing with the debt crisis. Fresh concerns have also sprung up with respect to the Netherlands, which is likely to hold elections in light of the governments failure to agree measures to slash its budget deficit.

As well as the weekends political concerns, the markets have had to digest some further disappointing eurozone economic data. A German manufacturing growth figure hit almost a three year low and figures out of the eurozone as a whole were equally alarming.

MPCs Posen gives sterling a boost

Sterling enjoyed a staggeringly strong week last week. MPC policymaker Adam Posen provided the main catalyst, with the minutes from the MPCs April meeting revealed that he did not vote for further quantitative easing. The market may have got ahead of itself in pricing out the likelihood of further BoE quantitative easing. Posen may well have voted for no change due to the recent uptick in inflation and may have just preferred to see the current round of QE run its course (which it will have done by time of the MPCs next meeting in early May). More monetary easing from the BoE is still a distinct possibility if UK inflation eases in the second half of the year and economic growth remains stagnant.

UK Q1 GDP figure to show some growth, albeit scant

Wednesday brings the release of the first quarter UK GDP figure. After last weeks excellent UK retail sales figure, we are fairly confident that we will not see another quarterly contraction. Estimates are falling around the 0.1% growth level, which is indicative of the uncertain footing from which the UK economy is building. Nonetheless, news that the UK has avoided a technical recession will be welcome (though the risks of disappointment are not insignificant).

End of week forecast
GBP / EUR 1.23
GBP / USD 1.60
EUR / USD 1.30
GBP / AUD 1.5750

Sterling is trading at almost a six-month high of $1.61 at present and we continue to view these to be excellent levels at which to sell the pound. The Fed is likely to be more hawkish in its communiqu this week, whilst the US GDP figure is also likely to be impressive, which could well help the US dollar bounce back. Sterling is trading at almost a two-year high against the euro above €1.22 and further gains are looking likely, though we may see upward progress stall as nerves kick in ahead of Wednesdays GDP figure.

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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