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Currency Watch: Sterling strengthens as Europe struggles
Political negotiations have broken down in Greece as Alexis Tsipras failed to rally any anti-bailout support.
The mandate now passes to the socialist PASOK party. While it seems likely that Greece will return to the polls, perhaps the recent radical exit plans of the leftist Syriza party may coerce a more right-centre cooperative to emerge. The lesser of two evils, as they say.
Albeit somewhat eclipsed by the events in Greece, Spain has been making a racket of its own. The Spanish government nationalised Bankia bank with €4.5 billion in loans which had been previously given by the government were turned into shares.
The government now has a 45% controlling stake in the company. The Spanish stock market fell 2.77% to a nine year low, government bond yields were up above the 6% mark once again, and estimates for the 30-odd billion Bankia bailout, announced on Thursday, were being coined as the “tip of the iceberg” for the Spanish banking industry.
In the UK, the Bank of England decided to pause its asset purchase programme.
As inflation has remained uncomfortably high in the UK through the past couple of months, the hawks on the MPC will have balanced that higher inflation with the disappointing growth outlook.
It is therefore likely that the persistently sticky inflation picture in the UK will see the Bank revise its CPI estimates higher at its next Quarterly Inflation Report.
We suspect that the minutes, released in a fortnight, will show a readiness to act should the situation deteriorate further (in the UK or Europe) and further communications from the Bank and the MPC members to emphasise the fragility of the UK recovery. We personally believe that the data from the UK will make this a fairly obvious state of affairs as well.
For now the MPC are ready to battle the devil they know as opposed to the devil they don’t.
GBP has had one of its best weeks in a long time, getting close to the 1.25 level versus the euro. We are unsure however, as to how long it will last.