How Will Euro Exchange Rates Be Affected By A Cyprus Bailout?

With news of Cyprus now requesting a bailout (on top of Greece, Portugal, Ireland, and the Spanish banks) the question that most people with an interest in currency exchange are asking is how will euro exchange rates be affected?  In truth the scale of the bailout is minuscule when compared to the Eurozone crisis as a whole, and was largely expected given Cyrpus’ status as Greece’s little brother with the contagion flowing from the Greek banking problems.  However the main concern for European leaders is more symbolic as it highlights the “contagion” that many fear could trigger a collapse of the Euro if they cannot put sufficient firewalls in place.  The news also places additional pressure on the upcoming European summit, scheduled for the 28th and 29th June, to provide assurances or some form of credible solution to the crisis- this looks increasingly unlikely at the moment with divides between Germany and other member states still very evident.  My view is that this is not another nail in the coffin of the Euro as I expect the single currency to come through the crisis but I think it is another sign that Euro weakness will likely continue and, as if it wasn’t already obvious, there will be no quick fix to the problem.  It also highlights the importance of other major powers and their approach to the Eurozone with Russia already pumping in €2.5bn to prop up Cyprus and Chinese investment in Cypriot projects are a major influence in the region.

With sterling euro exchange rates I expect the pound to remain relatively robust against the single currency due to the overriding pressure on the Euro, but there may be opportunities to get a good exchange rate to sell euros in the coming days on the back of UK economic data.  With the expectation of more Quantitative Easing in the UK already being priced into the market, Thursday morning could still be a game-changer if the UK GDP figures are once again revised down and show the UK economy is worsening.  I would be prepared to take advantage of any spike in exchange rates this creates rather than waiting for rates to come down consistently as I am not convinced they ever will.  In the immediate future look out for the Public Sector Net Borrowing figures due out in 35 minutes for a possible quick fix on rates if UK borrowing has increased sharply.

With EUR USD rates I expect the Dollar to remain strong against the single currency and possibly even improve on current rates of 1.25 if Europe cannot provide the credibility and united leadership required to navigate current economic conditions.  All this comes against the backdrop of “Operation Twist” which is an extension of the Federal Reserves Quantitative Easing program- in calmer times this would normally see the Dollar weaken sharply, but it just goes to show how bad the Euro problem is if money is still pouring into the greenback due to the flight to safety.

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