ECB Sends Out the Bailiffs

Sterling hit a 19-month high against the euro yesterday as investors shunned the single currency ahead of the closure of the European Central Bank’s emergency one year loan provision. With a July 1st deadline, banks have to repay EUR442bn of borrowed funds in the biggest amount lent in a single liquidity operation. Fears that a cash shortfall could total more than EUR100bn drove the pounds value above 1.23 euros. The one year loans can be rolled over and be replaced with three month loans at a base rate of 1%.

From the UK, we heard comments from the MPC’s Fisher supporting the recent decision not to tighten fiscal or monetary policy in sharp contract to those of Andrew Sentance who has remained hawkish even after the recent budget. Data was limited to British mortgage approvals showing an unexpectedly flat in May while consumer credit increased GBP300m. The mixed data could lead the BoE to maintain a neutral stance over the next quarter as it aims to encourage a sustainable recovery.

The euro has hit an all-time low against the Swiss franc as the funding concerns about the euro zone prompted investors to move their funds to the safe-haven Swiss currency. ECB council member Ewald Nowotny said “the ECB is not considering offering banks another batch of 12-month loans to replace those expiring on Thursday”. As a result, market participants may continue to see pressure on the euro as the debt crisis weighs on the outlook for future growth. Nevertheless, economic confidence in the Eurozone unexpectedly increased in June, with the index rising to 98.7 from 98.4 in the previous month, while the gauge for business sentiment held steady at 0.37.

The U.S dollar gained ground against most of its major counterparts following the rise in safe-haven flows as investors scaled back their appetite for risk. US consumer confidence has also weakened as investors weigh the prospects for a sustainable recovery in the world’s largest economy. The Conference Board’s gauge for household sentiment is expected to fall to 62.5 in June from 63.3 in the previous month and the ongoing weakness within the private sector may lead the Fed to support the economy throughout the second-half of the year as Chairman Bernanke maintains a dovish outlook for future policy.