Markets are bracing themselves for Greece’s “make-or-break” elections tomorrow. While foreign exchange flows and equity price moves suggest that some investors remain optimistic, UK policymakers made an early move to ring-fence the British economy and its banks. Greece’s election is still the worry and investors are growing anxious that if the Syriza Party wins and follows through on a promise to tear up Greece’s bailout, Germany’s expected hard-line response will lead to a break-up of the eurozone. With that in mind, selective risk-taking that saw the safer US dollar lower was surprising; however, investors were also presented with more sub-standard economic data that are strengthening the case for more dollar-negative Federal Reserve monetary easing.

Sterling

Investors spent another session mulling over their sterling exposure, and consensus was mostly negative before the Bank of England confirmed what markets had been pricing-in: that more quantitative easing was on its way. The central bank’s head, Mervyn King, was speaking on Thursday night alongside Chancellor George Osborne. Comments from both warned investors that Europe’s crisis could yet worsen and that Britain was preparing to pull down its shutters to protect its economy and banking industry. Mr King said that if global conditions deteriorated markedly, the Bank of England would activate an emergency liquidity programme that would inject £5 billion per month into the banking sector for a short-term period, if required.

US dollar

In spite of upcoming event risks in Europe, the safe-haven US dollar fell to three-week lows on a trade-weighted basis; a fall facilitated by increased speculation that the Federal Reserve will introduce more monetary easing as early as next week. The buck’s broad decline continued this week following more evidence of a slowing economy.

Euro

Investors have held their nerve in recent days, refraining from any more panic-driven position-taking on the euro before what could be the most significant event of the eurozone debt crisis to date. The euro pressed forward, albeit cautiously, almost reaching June highs against both the US dollar and British pound on bets that Greece will stay in the euro following Sunday’s critical vote. Meanwhile, some economists are predicting that even if the anti-bailout Syriza Party wins, central banks from across the globe have in place a plan to respond with a coordinated liquidity operation. Such measures would help temper any market fallout that would almost certainly accompany talk of a eurozone break-up.