Sterling falls sharply despite pause in QE

By Kenneth Broux, Senior Market Economist, Altaz Dagha, Strategist, Corporate Markets

Sterling suffered from heavy selling pressure all week, despite the BoE announcing a pause in quantitative
easing. Sterling lost ground against all G-10 currencies and broke below key support versus the USD (1.57008).

Risk aversion trades continued with equity markets falling for the third consecutive week while sovereign CDS spreads widened further, particularly in peripheral eurozone countries. EUR/USD fell below 1.37 for the first time since May.

Euro weakness has been prominent despite the EC endorsing the budget proposals from Greece to bring
the fiscal position under control. Attention turned, however, to Spain and Portugal. A disappointing Spanish
bond auction and a failed bill auction in Portugal led to a widening of spreads with bunds while Spanish and
Portuguese stock markets fell 5% in one day.

With little in the way of tier one economic data and the ECB unsurprisingly leaving the refinancing rate unchanged at 1%, equity markets were the main FX drivers over the week. In the ECB press conference, Mr. Trichet played down the need for a Greece bailout.

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* All charts are sourced to Lloyds TSB Corporate Markets Economic Research, Bloomberg, IMF and Datastream

 


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