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The pound regained most of last week’s losses against the euro exchange rate

The pound regained most of last week’s losses against the euro yesterday as markets were spooked by the lack of progress in talks between Greece and its bondholders. Sentiment wasn’t helped by less than inspiring US economic data.

Jitters ahead of any Greek resolution sent Portuguese bond yields to euro era record highs. Greece’s prime minister Lucas Papademos attempted to lift hopes by saying a deal with private debt holders should be reached by the end of the week.

Consequently, there was an increase in demand for safe haven currencies with the US dollar, Japanese Yen and Swiss Franc all benefiting.

Data from the euro zone continues to deteriorate. The euro zone unemployment rate for December now stands at 10.4% according to the latest data from Eurostat. The reading is in line with the market consensus estimate and is a euro era high.

Of equal concern, the euro zone countries continue to diverge with the lowest unemployment rates for Austria (4.1%), Holland (4.9%), and Luxembourg (5.2%) and the highest for Spain (22.9%), Ireland (14.5%), and Portugal (13.6%). The largest three economies reported unemployment rates of 5.5% for Germany; 9.9% for France and 8.9% for Italy.

Worth noting that outside of the euro zone, the unemployment rate for December 2011 was 8.5% in the US; 4.6% in Japan and 8.4% in the UK.

Both EU president Herman Van Rompuy and Greek Prime Minister Lucas Papademos are now suggesting that an agreement between Greece and its bondholders, where negotiations started in July 2011 is now imminent and should be in place by the end of the week.

Greece remains under pressure to get the deal with its private investors pushed through in order to receive a second €130 billion aid package from the troika of the IMF, ECB and the EU.

Athens faces an upcoming €14.5 billion bond payment on March 20th, but it will need to have an agreement in place before then, as the paperwork takes at least six weeks.

Overnight, data from China’s manufacturers showed a stronger than expected start to 2012 but this failed to stimulate the Far East Asian markets from a moribund session.

With the start of a new trading month likely to bring more concerns about the state of the world economy, particularly in the euro zone and with the UK economy contracting in the fourth and last quarter of 2011, market sentiment is likely to remain subdued at best giving support to the safe haven currencies.

Compiled by Tony Redondo