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Currencies DirectAugust 2012 Newsletter

Report by: Phil Ryan of Currencies Direct

ECB delays the inevitable

In this article we refer to the volatility for the single European currency and this month is no different as the markets continue to digest the latest ECB rate decision. Since the meeting and press conference we have seen the retracement of GBP/EUR following the 4 year highs seen back in July. ECB President, Mario Draghi, announced a rather bearish statement focusing on the fundamentals of the system on the long term rather than providing the immediate 'bazooka' that investors were expecting. Mr Draghi strongly hinted that the Securities Markets Programme or bond buying scheme would likely continue on the requirement that European governments approach the current bailout fund, the EFSF, for an official request for aid which in turn will allow the ECB to continue the bond buying scheme. This may be because of pressure and anxiety from the superpower Bundesbank.

Spain's and Italy's Prime Ministers Mariano Rajoy and Mario Monti also met earlier this month to discuss the problems they are both facing in the markets. Main topics were sure to include their debt problems, with both nations struggling funding and flirting witha formal bailout request from the ECB.

The BoE interest rate decision did not pull any surprise comments with the interest rate being kept on hold much as anticipated. Although, there was talk of an interest rate cut it was quickly quashed as the Monetary Policy Committee thought it may hinder UK banks ability to lend. It is clearly apparent the bank needs to come up with a definitive plan to combat the slowing economy with the strong contraction seen in construction figures being one of a number of alarming figures of late. This is again strong evidence that the extra £75 billion of Quantitative Easing was needed last month. These figures saw a sharp fall in GBP/EUR.This has also been played out in Equity markets too, seeing sharp falls in the FTSE, DAX and CAC all finishing in the negative with Wall Street and Asian trade following the same pattern of disappointment.

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