Berlusconi on the brink as Italian bond yields near the critical 7% mark

Tom Tong09/Nov/2011Currency Updates

GBP

Sterling rallied against the dollar on Tuesday and tracked gains made by the Euro, helped by the National Institute of Economic and Social Research, a UK think-tank, which stated British economic growth held steady at 0.5 percent in the three months to October.

NIESR’s forecast helped calm fears that the UK could be slipping back into recession, though concerns about a very fragile recovery remained as data showed industrial output stagnated despite a modest rise in manufacturing.

Additionally a weak reading of UK retail sales on Tuesday suggested that sluggish consumption may continue to hamper overall growth, with BRC retail sales falling 0.6 percent year-on-year in October.

Today’s only economic data of note is the latest trade balance figures for September which is anticipated to show a slight increase in the surplus.

EUR

The euro strengthened against the Dollar during Tuesday trade after Italian Prime Minister Silvio Berlusconi said he would resign once a new budget in 2012 is passed. The euro’s outlook remains gloomy however amid the political turmoil engulfing both Greece and Italy, with both countries’ borrowing costs showing no signs of easing.

Greece is scrambling to win emergency funds to avert bankruptcy as soon as next month with officials arguing over a new coalition government, while yields on Italian 10-year bonds hover above 6.7 percent, creeping up to levels seen as unsustainable.

Many analysts believe the euro will stay under pressure in the short term as it is unclear whether Italy’s new government will be able to boost growth and implement spending cuts to bring down debt levels. At 120 percent of gross domestic product, Rome’s massive debt is the second-highest in Europe.

USD

The Dollar lost ground against the Pound and Euro on Tuesday after reports revealed Italian Prime Minister Silvio Berlusconi will resign after the 2012 budget is approved. This decision by the Italian PM has gone some way to calming jittery investors which has in turn seen appetite for risk assets increase dampening demand for the Dollar. On a light day of economic data releases from the U.S, the markets focus will be on this afternoon’s speech from Ben Bernanke.

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Written by Tom Tong

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