European shares were given a huge boost following gains seen in Asia. Yesterday’s news that five central banks worldwide are set to provide commercial banks with three additional batches of loans have eased investor nerves. The aim of the move is to help ease funding pressures. So, the question you will all be asking is how does this directly affect foreign exchange? The bottom line is it already has. The euro steadily rose more than 1 percent against the US Dollar and has also made a steady advance versus sterling. The five central banks involved in this movement are the US Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan and the Swiss National Bank.
Pound Sterling – UK Markets
Sterling has continued to weaken against the US Dollar which now extends losses to its fourth consecutive week. There is further speculation in the markets that the Bank of England may introduce additional monetary stimulus. Following a recent BoE meeting there have been murmurs in the market but this continues to be nothing more than a rumour mill. Reports earlier this week showed that retail sales fell and jobless claims rose even as inflation accelerated. It has already been stated that the BoE need to be more creative in their approach but a question mark remains as to whether quantitative easing is the necessary solution.
US Dollar – US Markets
It seems as though I am constantly battering the US with bad news this week but unfortunately my hands are tied on this issue. Whilst US factory output did increase for a second straight month in August, the rate of growth slowed in comparison to July’s figures. Factory output in August increased by 0.5 percent compared with 0.6 percent in July. Stock market volatility and rising economic uncertainty continue to hamper confidence in the US economy. The Dollar itself is holding firm against sterling, maintaining the gains it saw at the back end of last week.
Euro – European Markets
European finance ministers will meet today in an attempt to lay out plans to deal with the regions ongoing debt crisis. Officials from nations beyond Europe will also attend the meeting as there is concerns the issues could spread beyond the eurozone. The biggest debate will surround whether or not governments will issue the release of more funds for near-bankrupt Greece. Furthermore, European countries will look to discuss the possibility of issuing Eurobonds to guarantee each other’s borrowing.
The euro has fallen, snapping two day gains versus the US Dollar and the Japanese Yen over the concerns surrounding collateral required by some nations to participate in the Greek bailout. These worries will threaten to de-rail talks today should opinions be divided. The discussions could add to exciting Friday afternoon movements that we are all far too familiar with.
Other Currencies – Highlights
The Rand has continued its decline against the greenback. It now stands as the worst performing currency among all of the dollar’s most traded currencies. Foreign investors have been selling South African bonds at the fastest pace since 2008 due to concern over Europe’s debt crisis causing funding shortages for banks and curtailing demand for riskier assets.
Pound falls further
British Pound Suffers Losses Ahead of Tuesday's Critical Vote