Concerns grow over sovereign debt contagion
17/Jun/2011 • Currency Updates•
Sterling was pushed backwards yesterday morning as Retail sales came in far lower than expected. Retails sales at 9:30 showed a monthly decline of 1.8%, this was 1.3% worse than the market expectation of a half percent drop. Sterling remains to be in no man’s land due to the conundrum posed to the Bank of England. Economic data of late has highlighted inflation sitting at over 4.0%, whilst economic growth seems to be continually stagnant. On the day sterling dropped 0.8% against the Dollar, but managed to gain 0.5% against the Euro in view of the negative sentiment caused by the Greek debt issues. There is no significant UK data out today, so yesterdays trends may prevail.
The Euro has been rocked this week as fears of a Greek sovereign debt default escalated and worries over possible contagion intensified. The absence of economic data on today’s European calendar leaves the door open for sentiment trends to remain in control of currency market price action. This suggests continued gains for safety-linked currencies at the expense more sentiment-sensitive pairings most notably the commodity linked ones (NZD/AUD/ZAR).
Jean-Claude Juncker – Luxembourg’s Prime Minister and head of the Euro Zone group of finance ministers – said making private investors assume a degree of losses on Greek debt as part of a second round of aid would “risk contagion” and carry “unpredictable consequences”. Most ominously, Juncker said progress on resolving the Greek crisis is “extremely difficult”. His comments appeared in German newspaper Tagesspiegel.
Meanwhile, former Federal Reserve Chairman Alan Greenspan said there is a high probability of a Greek default – qualifying such an outcome as “close to certain” and likely to happen sooner rather than later – while warning that contagion beyond the Mediterranean country’s borders was a possibility. For their part, the markets are putting the probability of Greek default at 79.7 percent according to what is being priced into credit default swap (CDS) rates.
As mentioned there is little notable European data today save for EU & Italian Trade Balances.
The US Dollar outperformed its counterparts yesterday and overnight as investors flock toward the safe haven currency for a consecutive session. As fears spread throughout Europe, it appears worries over contagion and the possibility of Spain together with other peripheral nations feeling the burden of Greek woes, despite the IMF looking closer to coming to a deal to help the indebted republic . With this issue continuing to linger, there is the distinct possibility that we could see further Dollar strength as investors detach riskier assets and liquidate into safe havens. Currently reaching key psychological and technical levels on both EUR/USD and GBP/USD and the possibility that we could see profit taking at the end of the week, it will certainly be and important closing figure that could also set the trend for the upcoming weeks.