Sterling gains vs euro as debt woes resurface; US outlook moves to negative

Tom Tong19/Apr/2011Currency Updates

GBP

Sterling performed well against a weakening euro yesterday but lost ground from recent highs against the dollar despite the economic situation in the US taking a turn for the worse. Sterling moved up from recent lows against the euro yesterday as the single currency suffered from fresh sovereign debt woes. The euro was sold off strongly after news hit the markets that the Germans felt Greece would need to restructure its debt by the end of the summer. The euro slipped further against sterling as the results of the Finnish national election raised question marks over the timescale for the Portuguese bailout being implemented. Despite the US having its debt outlook changed from stable to negative by S&P, sterling lost ground against the dollar as speculators unwound carry trades which supported the dollar. The move could also be attributed to a flight to safety bid among the turmoil but the correlation between the dollar and flights to safety has diminished over recent months. It is a quiet day for UK economic data today with most market participants looking towards the BoE minutes released tomorrow at 09:30.

USD

The US was hit with fresh sovereign debt concerns yesterday as the ratings agency S&P threatened to downgrade its credit rating, moving its outlook from neutral to negative. The move caused global markets to tumble but actually saw the dollar index move up as investors unwound carry trades on speculation that ultra-loose monetary policy in the US may be abandoned in future to avoid the downgrade. Despite the dollar index, which measures the US unit against a basket of six others rising to 75.504 from 74.867, the outlook for the US economy in the longer term is bound to be a cause of concern for the Fed. The reason that S&P sought to change the outlook on the US sovereign rating is down to a lack of progress from Congress and Obama in coming up with a coherent plan to reduce the debt situation and slash the budget deficit in the US. Unless there is some innovation soon the dollar could fare poorly over the coming months. Most major analysts still retain a bearish view on the prospects of the US dollar as it is likely to remain a funding currency, alongside the yen, in carry trades as ultra-loose monetary policy means interest rates will remain low. The only data release of any significance is the US housing starts figures at 13:30, which could add more woe to the US predicament.

EUR

The single currency suffered yesterday as rumours emanated from Germany that the Greek debt situation, which was the market focus last summer, was likely to raise its head again as the Greeks were unlikely to make it through this summer without further restructure of its debt. This euro-negative news was exaggerated by the news that an anti-euro party in Finland was receiving strong support in the on-going elections meaning any chance of Portugal’s bailout being ratified could diminish. The euro lost ground against both sterling and the dollar as the yield on Greek debt soared to unprecedented levels, meaning the chances of a default in future becoming more likely. Despite Spain being seemingly immune from contagion, yields on its debt during an auction in Madrid were up half a percent. The significance of the emergence of an anti-euro party in the Finnish elections is that the Fins have the right to veto their involvement in EU requests for bailout funds. With more and more countries in Europe footing the bill for the bailouts of the periphery any continuation of this trend could cause major worries over the future of the single currency as we know it. In terms of data out of euro today we have the German PMI figures printing before 9 and the EMU consumer confidence figures at 15:00.

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Written by Tom Tong

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