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The Pound and the Euro both suffer losses, but remain tightly linked to each other

The Pound is trading at a steady rate of 1.167 today against the Euro, despite German Chancellor Angela Merkel’s claim that “Europe is in one of its toughest, perhaps the toughest hour since World War Two.”

Silvio Berlusconi signed his letter of resignation to President Giorgio Napolitano on Saturday amidst an oxymoronic euphoria of anger and rejoice. An impassioned crowd threw coins at his limousine and hurled insults as he officially relinquished control over a country that had reached boiling point on the brink of financial disaster under his rule. Thousands of demonstrators chanted “Clown! Clown! Gangster! Gangster!” before the streets broke into delirious jubilation and street parties erupted outside the Quirinale presidential palace.

Berlusconi’s resignation paved the way for former European Union Competition Commissioner Mario Monti to take the helm on Sunday. Italy’s Treasury managed to sell its full €3 Billion note quota yesterday with an increased demand of 1.47 times the amount on offer, yielding at a high rate of 6.29%. On Saturday an austerity program was passed that included an increase in VAT from 20% to 21%: a freeze on public-sector salaries until 2014: a gradual rise in the retirement age of women from 60-65 matching that of men: and a stricter legislation aiming to crack down on tax evasion.

The full quota of bond sales and the implementation of austerity measures show a sign of development, but the hope of financial stability that Mario Monti and his technocratic government bring, appears to be undercut by growing fears that in the long run Italy’s financial troubles may extend into the realms of no return.

Safe haven currencies such as the Japanese Yen and the US Dollar have benefitted from investors’ fear as risk trends have not followed through. The Pound has suffered almost as much as the commodity currencies, losing 1.0% to both the Yen and the Dollar. Sterling’s losses keep it in line with the Euro as investors are mindful of the Bank of England’s quarterly inflation report that is announced on Wednesday.
In conclusion, the technocrats in Italy – and Greece too for that matter – represent hope for the Euro, but the markets are holding out for hard evidence of economic improvement before they place faith in the single currency during this period of fiscal hardship.

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