The Euro peaked above 1.2650 against the Dollar and was then subjected to fresh selling pressure.
Sterling / Euro and US Dollar exchange rates
The Pound bounced back to a high of 1.2380 against the Euro, as the initial optimism of a Spanish bailout cooled, while the government takes time to do an audit and discover how much of the €100 billion will be required to plug the black hole in Spain’s banking system. The UK currency also traded at a high just under 1.56 against the Dollar, as news of an impending bailout increased risk appetite and reduced the appeal of the Dollar as a safe haven.
Spain will be the fourth Euro-zone nation to request a bailout and the focus now will fall on Italy, as speculation increases that Europe’s third largest economy may be the next country to seek a bailout. The threat of contagion will continue to be a noose around the Euro’s neck and the single currency slipped against the Dollar and the Yen yesterday.
The Pound encountered resistance in the region of 1.5570 against the Dollar and retreated to lows just below 1.55. The decline was cushioned to a degree by a Sterling recovery against the Euro, as the initial losses were reversed to a high of 1.24 by the close of trading last night. There will be further concerns over UK demand and also a growing political risk, as tensions within the coalition increase, as growth remains weak.
The latest RICS house price index registered a modest improvement to -16% from -19% previously with market volumes tending to deteriorate further. Defensive considerations will remain very important in the short-term and renewed stresses within the Euro-zone would trigger defensive flows into Sterling. There will be uncertainties surrounding the UK banking sector and that is likely to curb support with volatility liable to increase.
The improvement in risk appetite didn’t last too long, as stocks and commodity prices dropped over-night, amid concern that the debt crisis in Europe is spreading to other high-deficit nations. The Australian Dollar and the New Zealand both weakened, reversing earlier gains, as concern that Spain’s bailout package signals a worsening of the debt crisis.
Euro / US Dollar
The Euro peaked above 1.2650 against the Dollar and was then subjected to fresh selling pressure, as confidence drained from the market and investors flocked to relative security of the Dollar once more. The Spanish bailout inevitably remained an important focus following the weekend announcement and there was a sharp decline in Spanish 10-year yields to below 6% for the first time in three weeks.
There were uncertainties whether the bailout funds would be made available through the EFSF or the ESM and there were important reservations surrounding the ESM. There was also increase in stresses surrounding the Italian bond market with benchmark yields rising to above the 6% level with fears that Italy would also require a bailout.
There were no major U.S developments through the course of the day but there is likely to be increased speculation over a bias to further monetary easing at the next FOMC announcement, considering the tone of recent comments from regional Fed presidents The Euro initially broke below 1.26 and lost further ground with a move to 1.25 last night.
Data Released Today
U.K 09:30 – Industrial Production (April) – Manufacturing Production
U.S 13:30 – Export Prices (May) – Import Prices
U.K 15:00 – NIESR GDP Estimate (3 Months to May)
U.S 19:00 – Federal Budget (May)
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- Sterling Euro US Dollar Foreign Currency Forecast – The Pound bounced back against the Euro and the U.S Dollar
- The Pound bounced back above 1.21 versus the Euro