Many experts predict that the ongoing sovereign debt crisis in the eurozone will provide some support the forex rate of the pound against the euro. As the markets continue to be concerned about the financial situations of some eurozone member states, the previous gains of the single currency may be jeopardised. The prospects for higher interest rate have their limitations and cannot provide indefinite support for the euro at face of worsening economic and liquidity issues in the region.
After the European leaders have resolved the terms and conditions of the emergency bailout loan for Portugal, any hope of ending the eurozone sovereign debt problems seem to have been thwarted by the latest uncertainties the Greece. This previously bailed-out peripheral eurozone state is again undergoing financial difficulties as the spreads of its government-issued bonds widened. The markets are again worried that the country may again need to restructure its debt.
The yield of Greece’s two-year treasury bills is rising to worrying levels, indicative that investors are dumping the government-issued bonds. More and more bond investors are losing confidence on Greek debt that they are willing to sell their Greek bond holdings at lower prices, thereby increasing the yield spread. The yield recently rose to a record high of 18.4%. This could force the country to renegotiate its borrowing terms and the country may default on its financial obligations.
As a result of the renewed market fears about Greece, the forex position of the single currency is now again under threat. The contagion may spread much faster and more ferocious than previously feared.
Both Spain and Portugal have also undergone similar dilemma yesterday. Those who are interested to make money through the forex market may not anymore have the same level confidence on the euro compared to a few days ago when the European Central Bank announced a rate hike. The resurgence of the eurozone worries provided some support for the pound-euro exchange rate. After six months of weakness, the British currency rallied for the first time against the euro.
Meanwhile, the Asian market situation is also experiencing some setbacks as the economic momentum of China is somewhat encountering resistance. Various economic indicators were recently published by China but the annualised consumer price index (CPI) figures caught the attention of investors and analysts. The CPI inflation data indicated a 5.4% increase on a year-on-year basis for the month of March. This was a bit higher than the 5.2% predicted figure but significantly overshoot the February CPI of 4.9%. The soaring prices of food have provided strong influence for the CPI increase. According to the official report, food prices rose to almost 12% on an annualised basis.
In response to the soaring inflation, the Chinese monetary policymakers are expected to further raise the base interest rates and provide boosts for the Yuan. If this trend continues, some experts believe that it could pose serious threat to the recovery of the global economy. The economic growth of China is still exceeding expectations, particularly in the retail sector, but high inflation is pressuring the Chinese central bank to resort to tighter policies.