Sterling Euro reaches 20 month high despite strong Spanish debt auction

Tom Tong20/Apr/2012Currency Updates

GBP

The pound rose to its highest in nearly 20 months against the euro and a five-month high against the U.S. dollar, all of which helped it to climb to a 20-month peak on a trade-weighted basket of currencies, data from the Bank of England showed.

More gains are likely as investors seek to exit the euro zone troubles and are wary of putting into the U.S. dollar as further easing by the Federal Reserve is still an option

If sentiment in the euro zone remains at its current, we will find the 2010 low a bit tough to break. But if the euro zone troubles deteriorate, then that will go easily. In which case, cable could also come under pressure. The euro fell against the pound, its lowest level since end-August 2010. A widening of spreads between 10-year German bonds and comparable UK gilt yields have also worked in favour of sterling against the euro.

USD

The US dollar has held steady on the day, as market participants remained wary of shifting their funds into riskier asset classes, but avoided the temptation to move their funds lock stock into the safe haven currencies following an encouraging Spanish bond auction. The GBP/USD exchange rate has settled above the key psychological level of 1.6000. The Greenback is expected to trade on a neutral to negative footing ahead of tomorrow’s G20 Finance Ministers’ meeting in Washington.

EUR

Stocks are limping into the final session of the week as lingering eurozone worries. On Thursday, a solid auction of Spanish bonds had eased fears about sovereign debt contagion, but it is clear that many investors remain very concerned about the Spanish economy’s health as the country undergoes a sharp austerity programme. Thursday’s successful Spanish bond auction has managed to prop the single currency for the time being, but any upside has been limited to this point.

Greece, Ireland and Portugal asked for international assistance when interest rates on their government bonds hit similar levels. The reason for the rise in interest rates is the deep recession caused by the government’s austerity measures. The International Monetary Fund (IMF) forecasts an economic decline of 1.8 percent in the current year for Spain. For the euro zone as a whole, the IMF predicts a 0.3 percent contraction. As a result, despite the painful cuts, the targeted reduction of the budget deficit will not be achieved and the national debt will continue to rise.

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Written by Tom Tong

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