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Exchange Markets React Badly To Irish Bailout

Market CommentaryExchange Markets React Badly To Irish Bailout

In Brief

This morning the Irish Government announced that a bailout package with the EU-IMF had been agreed. However the announcement contained little detail, and the markets have not been reassured that the agreement will resolve the EU debt crisis. In fact, following the announcement pressure on the Portuguese bond markets increased.

GBPEUR: Perhaps not surprisingly given the market’s poor reaction to announcements by the Irish Government, the euro has fallen against sterling in the last 24 hours. This could continue as attention turns to the bond situation in Portugal and Spain.

GBPUSD: The markets have perceived sterling to be linked to the euro: not surprisingly given recent announcements that British banks are vulnerable to several billion pounds of Irish debt. Accordingly there has been some weakness in sterling, and the dollar has risen slightly against the UK currency in this morning’s trading.

In Detail

GBP

The markets perceive sterling to be linked to the euro as already mentioned, meaning that the pessimistic news from Ireland has caused some weakness in the UK currency. For instance sterling has fallen slightly against the dollar in the last 24 hours. In addition the British Bankers’ Association has announced this morning that mortgage approval rates are lower than expected at 30.7. This suggests the UK housing market remains sluggish, and could further impact negatively on sterling.

EUR

Leading figures inside the EU and Irish Government had hoped that announcing a rescue package would calm the markets and restore confidence in the common currency. Instead the announcement has caused political instability inside Ireland and prompted fears that Portugal and Spain are next in line for an IMF handout. Hence following the Irish announcement, selling pressure on the euro increased, and the price for insuring government debt inside Portugal and Spain rose.

In other euro news Germany has announced that Q3 GDP has met market estimates of 0.7% growth compared to 2.3% in Q2. However whether this will decrease selling pressure on the euro given the Irish situation is uncertain.

USD

The dollar has benefited from reduced risk appetite about the euro and sterling in the last day, and gained particularly against the euro. In addition there are economic announcements today likely to affect sentiment toward the dollar. These include the release of the second Q3 GDP estimates: analysts expect that US growth will be sluggish.

Upcoming Tomorrow

The dissenting members of the British MPC are set to make speeches this week. This will shed light on their objections to Governor Mervyn King’s decision not to raise interest rates. In addition in the US the minutes of this month’s FOMC meeting are to be released. These will illuminate the Fed’s decision to pursue a second program of quantitative easing.

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