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Forex Flash: Europe in a nutshell - Nomura

Nomura economists have taken a look at the European predicament and have delivered a bitesize summary of their views looking forward.

They start by noting that fiscal tightening, financial deleveraging and sovereign debt market tensions should lead to a deeper-than-expected recession. They emphasize that the, “OMT announcement reduced probability of Spain calling an ECCL imminently. Our baseline remains an ECCL will be called.” Further, after a phase of relative calm, markets will likely test the backstop and pressure should rebuild around weak sovereigns. Additionally, they believe that GDP contraction, higher non-performing loans and rising debt trajectories remain the key euro area challenges. They write, “Because we forecast a weak economic backdrop, we retain our bias for lower ECB rates (in June).”

Looking to the UK, they add that they expect inflation to be sticky, albeit back in the right ballpark, but to slip below target during 2013 in the euro area. further, they finish by noting that while the BoE aggressively announced QE, liquidity and funding support in 2012, they see a bias toward doing more in 2013.

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