Euro sees 3-week highs versus dollar as Greek fears assuaged

Tom Tong01/Jun/2011Currency Updates

GBP

The British pound ended yesterday little changed, reversing having been on a charge against the US dollar following weak US data last week.

The markets remain concerned as to how the Bank of England will resolve the conflicting objectives of capping the sharp surge in inflation while keeping the fragile economy from slipping back into recession. So far the bank has proven willing to hold rates, despite uncomfortably high CPI growth rates, opting to make growth the policy priority. The economic data set due for release in the week ahead promises to reinforce the status quo, putting the pound on the defensive.

Today sees the release of UK Manufacturing PMI, Net Lending to Individuals m/m, Mortgage Approvals and M4 Money Supply m/m.

The former reading is expected to show manufacturing-sector growth slowed for the fourth consecutive month in May while home loan approvals extend the down trend in place since the beginning of last year.

This threatens to compound downward pressure on the Bank of England interest rate hike outlook, pressuring sterling lower against higher-yielding currencies.

EUR

The euro climbed to 3-week high against the dollar in yesterday’s session as fears of an imminent Greek restructuring were somewhat reduced. Reports suggested that Germany’s effort to push through a prompt restructuring package have been reduced and their opposition to a second bailout package is weakening. The euro gained 0.9% against sterling, 0.75% against the Swiss franc and 0.6% against the greenback. Germany has been pushing for a “soft restructuring”, forcing private creditors and the ECB to take some of the burden by extending the maturity of Greek debt. This German insistence on this burden sharing is in part driven by popular demand has arguably created a sense of stalemate as the SCB is very anxious about allowing such a haircut as it would be deemed to open the floodgates for debt held by other banks across the Eurozone. There is the possibility of quite a stand-off on this subject between the European Commission and the ECB.

USD

The US dollar sank against most of its counterparts in the overnight session as stocks advanced, thus sapping the demand for the safe haven benchmark currency, despite all US data showing poor signals. With the Chicago PMI, consumer confidence and the Case-Schiller home price survey all posting figures to the downside of market expectation. With US house prices sinking deeper than was seen in the financial crisis, the US housing market is now said to be in a double dip fall.  Today’s release of the ADP employment figures will be closely watched as the market anticipates the non-farm payroll data released on Friday.

JPY

The Japanese yen will be very closely watched following a warning from the ratings agency Moody’s that it may downgrade Japan’s sovereign debt rating.

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Written by Tom Tong

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