Currency watch: Eurozone back in the spotlight

The Budget has been and gone and not too much has changed. Osborne and the Treasury hailed the speech and changes as a "Budget for growth", although from where we sat it looked more like a "Budget for deficit reduction".

It was another dose of the same fiscal medicine that had been prescribed last year and it had little impact on sterling.

I won’t take you through all the headlines, but growth has been revised lower in the short-term to 1.7% in 2011 from 2.2% and inflation is set to stay above 4% for the rest of the year; two things that have got those commentators looking for stagflation – the combination of stagnant growth and inflation – hot under the collar.

One market factor that has been absent recently has been sovereign risk in peripheral Europe. The eurozone and its currency has managed to evade market attention recently after the problems in Libya and Japan, but all the attention is on them this week.

Portugal’s Prime Minister resigned on Wednesday night after he a lost a vote on austerity measures which now pretty much guarantees that we will see a bail-out and an early election in the country.

Portuguese bond yields and the country’s CDS, the cost of insuring debt against default, both leapt on this news and EUR has lost ground since then against its exchange rates. Spain has also seen 30 of its banks downgraded by Moody’s; this of course follows the downgrade of the Spanish sovereign on 10 March. The meeting today will have had only one topic: Portugal and how the contagion can be limited.
 
Jeremy Cook, chief economist at World First foreign exchange, 25.03.2011