European woes continue as Spain fall back into recession and banks are downgraded

Tom Tong01/May/2012Currency Updates

GBP

Sterling enjoyed another good day against the beleaguered euro yesterday as Spain joined the UK back in technical recession allowing sterling to make back gains from the end of the last week. The pound dropped against the dollar having climbed to its highest level in eight months and hitting resistance at the 1.63 level. In another worrying sign for the European economy, it appears that interbank lending is drying up as new data yesterday highlighted the appetite for bond issuance by British banks had faltered. This reluctance to lend is more worrying in view of the ECB LTRO issuance earlier in the year and the trillion euros that where pumped into the banking system to avoid this type of credit squeeze. This morning we will see the UK manufacturing PMI data printed which if positive will suggest a more positive GDP figure for the UK going forward. Elsewhere, the London election is neck and neck with Boris marginally ahead in the polls.

EUR

The euro suffered on Monday as data confirmed that Spain had officially fallen back into a recession joining Greece near the European scrap heap. This news signalled a gloomy start to the week as the problems in the eurozone were reiterated by a slew of awful data out of Greece showing that retail sales figures were in free fall. Retail sales volumes in Greece fell by thirteen percent year on year in February following a decline of almost eleven percent in January. There was further woe for Spain as the ratings agency S&P downgraded a further eleven banks after dropping the sovereigns rating to BBB+ with a negative outlook last week. The political turmoil in France continues despite Nicolas Sarkozy narrowing Francois Hollande’s lead in the polls. The possible election of Hollande is likely to be viewed negatively by the markets as they feel he is economically naive and not best placed to lead France through austerity. Despite all the doom and gloom, German retail sales figures were up and the market is now focused on the German PMI figures tomorrow; if these lag we could see the recent euro move continue.

USD

The dollar is still trading near an eight month high against sterling but made back some ground yesterday despite the dollar index falling 0.3% for the month. All in all it was a fairly quiet day for the Greenback with the issues in Europe dominating the headlines. However, a weaker than expected private report on business activities in the Chicago area showed growth was slowing, and if this trend continues with the Philly report worries may increase that the world biggest economy will stall towards the end of Spring. The big figure out of the US this week is Friday’s non-farm payrolls which will dictate the short term movement of the currency.

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Written by Tom Tong

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