Euro suffers as Spain fights to avoid bailout

Tom Tong13/Apr/2012Currency Updates

GBP

Trade weighted Sterling rose to a 19-month high yesterday posing a risk to exports and the British governments aim to rebalance the economy according to the BoE. Its rise came as data showed the UK’s trade deficit deepened more than expected in February to £8.772 billion as imports outpaced exports.

Exports to the Euro zone, the UK’s largest trading partner ticked up. But as concerns about Spain’s fiscal position pushed Sterling to a three-month peak of 82.27 pence versus the Euro, some strategists said the trade gap could widen as demand from the Euro zone falters.

Many market players said Sterling could climb further against the Euro, breaking through resistance at the 2012 high of 82.22 pence to rally towards 80 pence. Such a move could challenge policymakers’ aim of reinvigorating the UK economy through export growth.

EUR

The latest eruption of Eurozone sovereign debt worries, which drove the Italian Government bond yields sharply higher has so far had little discernible impact on the single currency. Whether a significant impact is expected depends on whether Spain is forced down the bailout route. If Spain can keep its head above water we may see a little weakness, which may hardly be noticeable. However if a bailout is required it will seriously call into question the severity of the austerity measures, and the country’s ability to deliver them. Some think the ECB’s liquidity measures are already beginning to wear off, this means bonds are beginning to rise again. All those who had hoped that ECB’s measures would have solved the crisis are now likely to be taught a lesson. It is slowly becoming clear that the ECB fought the symptoms of the crisis – but not the root cause. As the market increasingly realised this, we expect the see the Euro suffer.

USD

Risk appetite returned to the market yesterday leading to the USD losing ground against its major counterparts and higher yielding currencies. Higher than expected new loan figures in China and a 13.4% jump in money supply played a big part in the risk rally.

With regards to economic data out of the US, this was somewhat a mixed bag – a smaller than expected trade deficit of $46 billion was followed by a higher than expected weekly jobless claim figures. PPI data was also mixed; the core figure came out at 0.3% while the headline figure was unmoved from March.

Today sees CPI figures out at 12:30pm GMT, a 0.2% uplift is expected for March, any more could result in another risk run. Also out today are preliminary UoM consumer sentiment figures, which could see a small improvement from 76.2 to 76.4. Finally Core CPI is expecting high impact at 1.30 and at 5pm GMT Bernanke speaks, any talk of QE will impact the USD.

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Written by Tom Tong

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