Optimism that Europe's leaders could come up with a solution to the debt crisis has risen in recent days, and the news continues to dominate currencies around the world. On Wednesday last week, central banks around the world announced that a new wave of cheap USD liquidity would be provided to Europe's banks, which gave us a stronger (more expensive) Euro and a weaker (cheaper) US Dollar, with better rates for sending USD payments.
The EU summit on Friday should see further announcements, with any progress likely to strengthen the Euro further. Angela Merkel and Nicolas Sarkozy are meeting this week in advance of the summit, in a crucial week for the future of the single currency area. US Treasury Secretary Timothy Geithner will also be meeting European leaders ahead of Friday.
Markets have welcomed Italian austerity measures this morning, and Italian bond yields have fallen, easing pressure on the economy. Irish Prime Minister Edna Kenny has warned the nation to prepare for a tough budget this week. Any signs that debt-laden countries are bringing their debts under control is again likely to lead to a stronger Euro, and lower rates for exchanging sterling to transfer money in Euros.
Last week in the UK also saw George Osborne's autumn statement, which fortunately did not seem to weigh too heavily on sterling. The UK economy is still showing marginal growth, but the Pound would likely be under pressure should that change to negative growth and a second UK recession. This morning's service sector PMI survey showed encouraging growth, although UK business confidence fell from its October high.
Elsewhere, we saw exchange rates for buying Australian, New Zealand and Canadian Dollars as well as for transferring Thai Baht and South African Rand fall back, as investors started to move back into these 'riskier' currencies.
This week, we have interest rate decisions in the UK, Eurozone, Australia, New Zealand and Canada; interest rate changes usually affect a currency, with a rising interest rate giving a stronger currency making it more expensive. The UK announcement on Thursday comes at the same time as any extension to Quantitative Easing, and if the pressure on the Bank of England to increase its asset purchase scheme results in more QE, we would also expect the Pound to fall.
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