Market awaits out come of crucial EU summit as Von Rumpey talks up chances of Eurobond

Tom Tong27/Jun/2012Currency Updates

GBP

The pound strengthened slightly in the morning as risk sentiment improved amid talk that Merkel is considering allowing the ESM to lend directly to bank bailout funds. This news saw sterling advance for a second day versus the single currency as Italian and Spanish borrowing costs surged at debt auctions, boosting demand for the pound as a haven. Gilts fell after a government report showed Britain had a larger budget deficit in May than economists had forecast. The U.K. sold 1.25 billion pounds ($1.96 billion) of inflation-linked debt.

EUR

The euro fell to the lowest level in more than a week against the yen as Spanish and Italian borrowing costs rose amid concern a European Union summit this week will fail to solve the sovereign-debt crisis.The 17-nation currency slid against the dollar, reaching its lowest point since the 8th of June, after German Chancellor Angela Merkel was quoted saying she expects no shared debt liability in her lifetime.

Moody’s Investors Service downgraded 28 Spanish banks the day before yesterday, citing the country’s sovereign debt and rising real estate losses.

The two-day EU summit in Brussels starting tomorrow is the first meeting of European leaders since Greek parliamentary elections on June 17th that saw victories for pro-bailout parties. France and Italy are urging Germany to take decisive action to end the debt crisis, now in its third year. At the end of the day we saw the euro rise on news that Merkel would propose ESM lending to national bank bailout funds.

USD

The dollars performance was directly influenced by the news flows out of the US and UK. Consumer confidence figures where down from 64.9 to 64.4 and was updated in June to 62.0. This was a wider than expected decline as consensus was pointing to 63.5. Furthermore, while analysts expected Richmond Fed Manufacturing Index to rise from 4 to 5 in June, actual data disappointed the markets by falling down to the negative number of -3. However, house prices were up for a third consecutive month showing clear signs of a recovery in the US housing market.

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Written by Tom Tong

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