Poor German data weighs on the single currency as EU summit commences

Tom Tong29/Jun/2012Currency Updates


EUR

Risk sentiment and equities fell yesterday as a two-day EU summit began. As the second quarter drew to a close, lacklustre economic data out of Germany weighed on the euro. As European leaders gathered in Brussels for the EU summit, most investors had begun to price in an inability for the meeting to resolve the eurozone’s ongoing and escalating sovereign and banking crises.

Further pressure on the euro was added at an auction yesterday for 10-year Italian debt, which brought about its highest yield for six months, as Spain’s benchmark yield also briefly crossed the landmark 7% point. The current EU summit is seen as setting out a long-term route for the EU, focussing on further banking, fiscal, economic and political integration for the future (including a centralised bank regulatory authority, and a European bank deposit guarantee). However, investors are wary that leaders will do little to address the immediate stresses that have beset markets, and this has weighed on the euro.

Analysts from Morgan Stanley expect the euro to weaken upon the conclusion if the summit. This is based on observations of previous EU summits. This fall could be significant considering investor positioning on the euro has become more neutral as short positions have been unwound. Weak data from Germany also hit the euro, as German unemployment surprised to the upside, rising more than had been forecast. However, on a positive note, this morning EU leaders came to an agreement to allow the eurozone bailout fund to directly support struggling banks without adding to government debt. We have seen the euro rally sharply on the back of this.

GBP

Yesterday the latest scandal to engulf the financial sector spread further as political pressure grew on those responsible for the manipulation of LIBOR rates, including top management. Pressure has particularly grown on Barclays boss Bob Diamond to resign, although reports claim that he told a group of Morgan Stanley bankers that he had no intention to do so. Barclays shares fell up to 18 per cent yesterday, whilst the scandal spread across other banks such as Lloyds, RBS, and HSBC, whose share prices all fell significantly.

Weak economic data from the UK yesterday further confirmed its inability to decouple itself from eurozone stresses and global economic woes. The final estimate of the UK’s Q1 GDP figure was revised lower from minus 0.1 per cent to minus 0.2 per cent year-on-year. These latest figures could be the final push the Bank of England needs to resume further purchases of gilts, otherwise known as quantitative easing, in a meeting next week.

USD

The main headline news from the US yesterday was the passing of the Obama healthcare bill. The US Supreme Court handed the president a significant legal victory over his rivals, whilst angering conservative opponents of the policy. The key debate that will now go on will be over what the optimum size of government is in a struggling economy. The decision will have a key impact on the US healthcare sector, which makes up one-sixth of the US economy. Shares in health insurance companies fell sharply after the decision, although hospital stocks climbed as investors expect that hospitals will be waived the costs associated with treating uninsured patients.

Aside from the news regarding the healthcare bill, USD strengthened throughout the day attracting safe haven demand as investors feared a lack of resolution from the EU summit.

There were no large surprises in US data released yesterday, as on the whole data met expectations. The economy expanded at an annualised rate of 1.9 per cent for the first quarter, whilst first quarter corporate profits fell 0.3 per cent; the first decline since the financial crisis, primarily caused by a fall in overseas earnings.

US weekly jobless claims fell 6,000 to 386,000, but still remains far above the lows of the year.

Automatically updated when new data is released.

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Written by Tom Tong

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