Greek Storm Rattles Markets

“Risk-on” trading sentiment has suffered after the European finance ministers stalled the second bailout package for Greece, demanding that the Greek parliament approve the terms of the package of cuts and reforms. This has made the situation difficult for Greece with the Greek Finance Minister, Evangelos Venizelos, indicating that the parliamentary vote set to begin this weekend amounted to a vote on euro membership. Meanwhile, the outcome of yesterday’s monetary policy meeting of both the BoE and the ECB was in line with market expectations. Both central banks kept their benchmark interest rates unchanged, with the BoE announcing an additional £50 billion stimulus.

Pound Sterling – UK Markets

Sterling has recorded marginal gains against the Euro this morning, as concerns surrounding Greece failed to subside, after European finance ministers held back the second rescue package for Greece. However, the Pound has slipped against the US Dollar and is hovering around the 1.58 mark, after the BoE increased its asset purchase target by £50 billion to £325 billion. Justifying its move, the central bank indicated that a weak near-term growth outlook and associated downward pressure from the ongoing economic slump has warranted further stimulus. Markets are also grappling with fears of a double-dip recession in the UK, after NIESR indicated that the British economy continued to contract for the three months to January and is expected to remain flat for the rest of 2012.

US Dollar – US Markets

The US Dollar has moved northwards against the majors, as traders shunned high yield currencies following the European leaders’ refusal to approve the €130.0 billion bailout fund for Greece without conditions. Yesterday’s data indicating a more-than-expected decline in initial jobless claims, in line with last week’s seemingly strong non-farm payrolls data, highlights the recovery in the US labour market. Markets are keeping a close eye on today’s trade balance figures, along with the Reuters/Michigan consumer confidence data, both of which are expected to be largely bleak. The Federal Reserve Chairman, Ben Bernanke’s speech later in the day is also being keenly eyed for further cues on the economic environment.

Euro – European Markets

The European finance ministers’ reluctance to approve the €130 billion bailout has led the Euro lower against both Sterling and the US Dollar. To secure the aid, Greece now needs to detail a further €325 million of spending cuts, with reforms to be backed by a Parliamentary vote and all party leaders signing the agreement. The Euro-Dollar pair had earlier crossed the 1.33 mark during yesterday’s trading, after Greek leaders reached an agreement on austerity measures needed to obtain international aid. Yesterday’s ECB rate setting meeting did not offer any surprises, with the central bank leaving its key interest rate unchanged. In the post meeting press conference the ECB President, Mario Draghi, urged European lenders to take advantage of the central bank’s next offer of cheap three-year loans later this month. On the macro front, data released earlier today indicated that the harmonised German consumer price inflation remained steady for January, while French industrial output fell more-than-expected for December.

Other Currencies – Highlights

The Aussie Dollar has registered sharp losses against the US Dollar this morning, after the Reserve Bank of Australia (RBA) trimmed its forecast for the nation’s 2012 GDP growth and consumer price inflation. The RBA lowered its economic growth to 3.5% from the previous estimate of a 4.0% growth, while it cut its 2012 consumer price inflation forecast to 3.0% from the earlier estimate of 3.25%. The RBA also warned that the economy will be skewed to the downside, amid the disorderly outcome of the sovereign debt problems in Europe. This has spurred speculation that the central bank may resort to a rate cut in the future. The news of the Greek debt deal getting stalled, coupled with a steep decline in Chinese imports for January, has further sapped demand for the Australian Dollar.