Sterling nears 3-week high against dollar; markets await EU stress tests

Tom Tong15/Jul/2011Currency Updates

GBP

Following up from poor data out of the US over concerns over their economy, weak CPI figures prior to Ben Bernanke’s less inspiring speech and Moody’s reviewing on the US over their AAA rating, sterling was near a three-week high against the dollar.

Despite this rise against the dollar, sterling lost ground against the euro as concerns continue to grow over the fragile UK economy and interest rates continuing to stay at an all time low.

Gains are expected to be limited for sterling, as expectations of quantitative easing in the UK are strengthening across the board, as a result this saw the pound up 0.2% against the dollar.

Today’s major data releases are the US consumer price index figures and the European Monetary Union trade balance so you can expect to see volatility across the board.

USD

The dollar remained relatively stable as a result of market participants also retracing some of their moves from the previous day’s testimony when it seemed as though the door was open for potential QE3 measures. However, ongoing concern over the US debt ceiling would not completely go away, with S&P joining into the mix and also warning of some form of a downgrade to US ratings over the coming days – even in a situation where the ceiling were raised. Specifically, the S&P analyst said that the chances for a sovereign rating downgrade in the next 90 days had risen considerably; there is currently a one in two chance.

EUR

If ECB President Jean Claude Trichet hadn’t recently pushed the timetable for future interest rate hikes, Thursday’s data may have actually assisted the euro.

The Eurozone CPI headline number, which held at 2.7% while the core reading ticked higher to a 1.6% clip. Yet, more pertinent to the crisis watch, there were also headlines that would stir concern of contagion. Ratings agency Fitch announced that it had downgraded five Greek banks, Greece Finance Minister Papandreou said that a second bailout was needed immediately and Italy sloughed through a painful bond auction (the 5-year note yield was a three year high and 15-year maturity a record).

This week has also seen further speculation of contagion spreading, with the interim government of Belgium now moving into the frame.

Today sees the publication at 17.00 BST of further stress tests on a panel of 91 banks, with reports suggesting that 10 (including four small Spanish and three Greek banks) expected to fall short of required capital adequacy standards.

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Written by Tom Tong

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