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Quiet start to the trading week on the pound to euro exchange rate

In the euro zone yesterday, an Italian bond auction was well received, a Spanish one less so. Former European Central Bank (ECB) council member Lorenzo Bini Smaghi warned his former European policymakers against being complacent and recommended that they be prepared for the worst although he was at pains to point out that he still holds faith in the euro.

In an interview with CNBC, Smaghi explained that “in the past, so many times, we thought that the worst of the crisis was over, and then new waves of instability came in. So it’s no time for complacency; we have to prepare for the worst.”

Even so, the ex-ECB official said that the euro could still become the world’s second reserve currency in a clear reference to Chinese policymakers.

He feels that emerging markets will be unwilling to return to the having the dollar as the only safe haven. “There are many people who still believe in the euro and I think this is a currency that is safe,” he said.

Spain’s debt auction on Tuesday morning was generally poorly received with the amount raised coming in the middle of forecasts of the range of amounts the country was looking to raise. The Spanish Treasury issued €2.58 billion in total of bonds in the debt auction. The bid-to-cover ratios fell for both 3 and 6-month bills while the yield rose for the latter. The Spanish Treasury was looking to issue between €2 and €3 billion.

The quiet start to the trading week on the pound/euro exchange rate can be largely attributed to the scarcity of economic data out so far this week. Today should see stronger market movements as there is a raft of data out from Germany, France, Italy and the Office for National Statistics in the UK publishes UK final GDP for the fourth and last quarter of 2011. Any sign of further weakness in the UK economy will put pressure back on the pound and could see it slip from recent top of the trading range highs registered against the euro, US and Australian dollars.