Those Predicting a Eurozone Breakup Could Be Vindicated

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Those Predicting a Eurozone Breakup Could Be Vindicated

Those Predicting a Eurozone Breakup Could Be Vindicated



Well we didn't get anything new from the Fed yesterday, but the markets hadn't been expecting too much.

Ben Bernanke has been less vocal than his European counterpart about the continuing decline of economic growth.

There were plenty of words but little action was taken, the most surprising of which was the lack of extension to the guidance on policy rates for a further six months.

Such a move has raised questions over whether it is the doves or hawks who are in the ascendancy at the Fed.

The only thing that investors came away with was a reiteration of the rhetoric that they will step up to the plate if and when the economic conditions dictate.

In reality, to act now with further QE might just be seen as panicking. Spread betting investors seem to feel that if the Fed does approve QE3, it is most likely to be in September.

At that point they will have seen two more Non-Farm Payroll figures, as well as more manufacturing and services data, to help decide whether the US economy really is struggling.


Whatever it takes...

Most importantly, it also gives them a chance to see what Mr Draghi meant by saying he will "do whatever it takes" to improve the worsening situation in the Eurozone.

Which brings us neatly onto today. First up, we can expect more comments about how ghastly the Eurozone crisis is from the BoE, but the Bank is also expected to wait until Draghi has made his move.

After this, we will see today's main event in the form of the widely anticipated ECB meeting.

Despite the clear reminders from Germany that the ECB must not act outside of its mandate, the market will be bitterly disappointed not to see something.

Spain and Italy's borrowing costs need immediate attention, not merely now but over the longer-term. Without the bank resorting to full blown QE, it will need to come up with other measures to assist the banking system and lend to the wider economy.

Without a change to its mandate, it seems that the Eurozone crisis will be here to stay for a long time. Those who are predicting a meltdown in terms of a breakup could well be vindicated.

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By Simon Denham, 2 August 2012


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