Euro hits four-month low vs dollar as Italy debt worries escalate
13/Jul/2011 • Currency Updates•
With the headline reading for inflation falling for the first time in 3 months and a slowing recovery, the bearish sentiment underlying sterling is likely to continue to grow as the Bank of England maintains a cautious outlook for the region. As the BoE is likely to maintain its wait and see approach throughout the remainder of the year, sterling has very little in the way of data or monetary policy changes that are likely to help its recovery against a basket of currencies. If, however, the meetings minutes released next week show that an increasing number of MPC members are willing to embark on a further asset purchase program it is possible that cable could threaten to break lower. The next 24 hours of trading will be keenly watched as GBP/USD could face further selling pressures as the economic docket is expected to show a weakened outlook for the UK job market. All employment data for the UK is released today at 09:30 GMT+1.
Geopolitical fundamental issues continue to weigh on the euro as EU leaders appear to be failing to contain the risks of peripheral debt contagion spreading. Yesterday’s trading session saw the euro fall to a four month low against the dollar and another all time low against the Swiss franc.
Moody’s Investor Service cut Ireland’s credit rating to ‘junk’ status stating that it’s likely to need additional rounds of refinancing before returning to capital markets. Ireland has, however, stated that it has sufficient funding on existing packages that will last until 2013. Some say that this kind of story will only fan fears about the Greek crisis spreading – however, many believe that with Portugal being downgraded last week this was not such a huge shock.
Italian and Spanish borrowing also rocketed to a 14 year high as EU leaders have conceded that Greece may have to default on some of its debt. Silvio Berlusconi has appealed to the Italian people for national unity and ‘sacrifices’ in order the cut the nation’s debt mountain. This has prompted policy makers to set an emergency summit this Friday to discuss the debt crisis.
Yesterday saw the USD gain ground in the morning’s session as fears of Eurozone debt contagion flames were fanned with the downgrade of Ireland and debt problems in Italy and Spain. This was, however, relatively short lived, as the minutes were released from the Federal Reserve’s last meeting. These showed that policymakers believed further easing could be needed to help the US recovery if it remains as sluggish as currently seen. The USD has its own problems at present, chief among them being the political impasse with regard to lifting the government debt ceiling. Technically without resolve in this situation the US could see a debt default. Today we see Fed Chairman Ben Bernanke’s semi-annual testimony on the economy and monetary policy before the House Financial Services Committee today at 15:00 GMT+1, the rhetoric of which will be closely watched, particularly in relation to the debt ceiling and a possible QE3 package.