Positive Uk data fails to dispel gloomy outlook for the UK as Eurozone comes under fresh pressure

Tom Tong22/Jun/2012Currency Updates

GBP

Sterling dipped against the dollar on Thursday, giving up earlier gains despite robust UK economic data, as some investors trimmed positions on growing expectations of more easing by the Bank of England. Despite the surprise rebound we saw with British retail sales in May and an improvement in UK factory orders, this has done little to change the overall downbeat view of the UK economy. Analysts have warned us not to see the retail sales data in too positive a light, given that many believe they were distorted by the good weather.

In other key news British banks were among 15 global institutions hit by a sweeping set of downgrades from ratings agency Moody’s last night. HSBC and RBS were knocked a notch knocked of their ratings while Barclays were knocked down two notches.

EUR

The euro fell to a session low against the dollar with risk sentiment considerably hurt by further signs of a global slowdown and Moody’s bank downgrades. The euro also came under fresh pressure after data showed Germany’s private sector shrank in June for the second month running, with manufacturing activity hitting a three-year low. This is leading to suggestions that Europe’s largest economy may contract in the second quarter as the eurozone debt crisis intensifies. Overall the data does not make good reading and keeps alive expectations that the ECB will cut interest rates.

Many are also focusing on the meeting today between the leaders of Germany, Italy, France and Spain as they try to find common ground to restore confidence in the eurozone ahead of the full EU summit next week. Dangerously high borrowing costs for Spain and Italy have eased a little on market hopes for policy initiatives at the Brussels summit on June 28th. If it falls short, both countries may be pushed closer to needing sovereign bailouts. Independent auditors said yesterday debt-laden Spanish banks would need up to 62bn euros in extra capital to enable them to survive the economic crisis. The Bank of Spain said 100bn offered to Madrid two weeks ago would give a wide margin of error.

USD

The dollar rose against the euro and growth-linked currencies on Thursday after the US Federal Reserve disappointed investors who had expected it to opt for more aggressive easing – a move that would have boosted appetite for riskier currencies. Traders favoured the Greenback, having sold it before the Federal Reserve meeting earlier in the week as they hedged against a small possibility that the bank would take aggressive quantitative easing steps. Instead, it announced the continuation of its “Operation Twist” which sells short-term bonds and buys longer-term securities, prompting traders to buy back the dollar, which is widely viewed as a safe asset, as concerns over the global economy once again came to the fore. In other news the Dow Jones in New York endured its second worst day of the year with some banks closing down on fears of an impending downgrade from Moody’s.

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Written by Tom Tong

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