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Cameron not happy with Brussels serving

Revitalizing Global Trade: Cameron, Merkel

BRIEF: Write an analysis of the latest situation in the euro zone crisis as if for the Financial Times. This may bring in some opinion but it needs to be based on the facts (500 words). Time: 3 hours including research.

Britain is again embroiled in talks with the European Council as the UK government attempts to protect the interests of domestically based banks.

With negotiations ongoing, there are concerns among Eurozone members that this will delay a significant ECB asset review. The series of balance sheet tests is designed to shore up inadequate capital ratios and is seen as a major step towards the formation of the EBA (European Banking Authority), which will supervise the region’s banking union.

The UK has fears that it will lose political influence in Europe when the EBA’s mandate commences. Britain accounts for over 36% of EU wholesale finance transactions within the European Council, yet it has the same voting weight as Germany that represents only 13% of the market.

In December, Britain was successful in getting members of the customs union to agree to “double-majority” voting. The new system means that any rules imposed by the EBA must be voted in by the majority of EU states in addition to a second majority of non-Eurozone countries only. This will ensure that the states that have adopted single currency cannot dictate terms to the remaining 11 EU countries.

In spite of this, the UK government wishes to safeguard the double majority provision from potential repeal when the EU commission conducts another review next year. This has angered EU officials, as many had considered the talks in December to be the final barrier to the EBA’s inception.

The move is another example of a growing divergence of interests that has emerged between core members of the Eurozone and the Conservative government.

Officials in Brussels are growing increasingly weary of Britain’s blasé attitude towards EU membership. Last year, at the height of the UK’s “Brexit” debate, European commissioner Michel Barnier criticized David Cameron for attempting to “cherry-pick” EU policy. In January, German foreign minister, Guido Westerwelle wrote in the Times: “Saying ‘You either do what I want or I’ll leave!’ is not an attitude that works, either in personal relationships or in a community of nations.”

The Eurozone debt crisis has undoubtedly highlighted the need for fiscal union and greater central supervision in the banking sector. Although the UK has largely been a spectator to the events that have unfolded on the continent, the stabilizing effects of a better-integrated banking system will benefit the UK in the long run. Nevertheless, it is conceivable that the vision for a “genuine” economic and monetary union will not be realized within the next decade.

In the meantime, Mr Cameron is tasked with renegotiating Britain’s position in Europe ahead of an “in/out” referendum in 2017.  With the formation of the EBA, of which the UK will not be a part, Britain is now at risk of being further marginalized by the Euro-wielding member states. Given the prime minister will face scrutiny from both the opposition and Euroskeptics within his own party, we can widely expect wrangling with Brussels to continue.

Forex Report: Dollar rallies on Yellen news and pound slides on weak industrial data

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BRIEF: Write a 500-word report on moves in the global forex market in recent days and the factors that may have influenced those moves. Also include a reference to factors likely to affect the forex market in the next few days. Focus on major currencies. Time: 2.5 hours including research

The dollar index strengthened on the back of increased risk appetite as news broke that the President has backed Janet Yellen to lead the Federal Reserve, yet the greenback is still at an eight month low due to the ongoing budget crisis.

Yellen, currently second in charge at the U.S. central bank, will take over from Ben Bernanke on January 31st 2014. She is expected to maintain the accommodative monetary stance adopted by her predecessor. The former frontrunner Larry Summers, perceived to favour early tapering of quantitative easing, ruled himself out of contention last month.

In Wednesday’s trading, the dollar rose 0.4 per cent against the yen but remained flat against the euro at $1.3574.

The dollar’s safe-haven status has been in question as a result of the U.S.’s fiscal impasse. Investors looking to de-risk are currently backing the yen.

“It might be counterintuitive that the dollar rose on news that a dove is likely to be the next head of the Fed, but the news itself removed some of the uncertainty, and therefore contributed to risk-on sentiment,” said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank, to Reuters.

In spite of the aggressive monetary easing employed by Japan’s Abenomics programme, the U.S.’s uncertain outlook has seen the yen appreciate against the dollar in past months. Nonetheless, the minor 1.56 per cent appreciation over the previous three months compares with a 19.7 percent depreciation over the previous 12 months.

Meanwhile, sterling fell to a two week low after industrial production figures fell well below analyst estimates. Earlier in the week, the IMF (International Monetary Fund) doubled the UK’s 2013 growth forecasts. However, today’s ONS (Office for National Statistics) figures show a decline in manufacturers’ output of 1.2 per cent versus an anticipated 0.4 per cent increase. The pound is down against all major currencies including a -0.9 per cent decline against the dollar.

Looking ahead, markets will be awaiting the release of FOMC (Federal Open Market Committee) minutes from last month’s meeting. It was widely anticipated that the Fed would announce tapering of its bond purchasing operations, which currently stands at $85bn a month. When this failed to materialize, markets reacted frantically with the Dow rising 147 points on the day. Numerous factors could explain Bernanke’s decision- principal among these is the government shutdown- but traders will be anxious to find out exactly what influenced the committee’s decision. The minutes will be published today, 2pm Eastern time.

Overall, currency movements are set to remain constrained amidst protracted U.S. negotiations.

“We are definitely waiting for an end to the US shutdown. I think Thursday 17th is ‘d-day’ where they’ve got to come up with a solution before they default on the debt but markets are definitely in wait and see mode. Most clients are holding only very light positions at the moment,” said David Massey, an RBS forex analyst.

Euro strengthens in anticipation of ECB rate hike

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BRIEF: EUR/USD is 1.3664, down 0.95 per cent on the day- was 1.3794 at the previous close. THEN, JUST NOW, a short statement has been issued by the ECB

In the light of the latest implementation of austerity measures by Greece and agreement by euro zone finance minister to write off a further portion of Greece’s debt, the ECB expects some slight increase in upside risk to inflation. Thus the next move in interest rates is expected to be upwards.

After the statement, the euro is trading at $1.3910 = a rise of 1.8 per cent since the announcement

150 words. Time: 20 minutes

 

The euro leapt 1.8 per cent against the dollar on news that the ECB (European Central Bank) is likely to raise interest rates.

Eurozone finance ministers have agreed to take a more lenient stance on Greek debt repayment after concerns surrounding the country’s latest round of austerity measures. The ECB is expected to raise rates to combat increased inflationary risk.

After a weak start to the day, the euro is currently trading at $1.3910, up from $1.3794 at the previous close.

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