Spanish bond yields spiral above 7% as UK retail sales figures disappoint

Tom Tong20/Jul/2012Currency Updates

GBP

Sterling climbed to its highest level in more than 3-1/2 years against the struggling euro on Thursday as investors looking for safe-haven assets outside the indebted eurozone drove demand for the UK currency. Sterling has benefited in recent months from investors looking to cut exposure to peripheral eurozone debt by instead buying UK government bonds, considered a relative safe haven from the crisis. Sterling outperformed both the euro and dollar despite weaker-than-expected UK retail sales data that fuelled concerns the economy is struggling to emerge from recession. Figures were expected at 0.6% down from 1.5%, however came out even worse at 0.1%. This is testament to the demand for sterling as it had little effect on the currency. The pound also shrugged off minutes from the Bank of England’s Monetary Policy Committee on Wednesday that showed policy makers discussed a possible interest rate cut and additional asset buying at their meeting earlier this month.

Euro

The main news news in Europe was focused on Spain as ten-year Spanish bond yields hit 7% yesterday amid fears that the debt burden created at these levels is unsustainable. The rise above this psychological level continues to put pressure on the euro.

Angela Merkel won yesterday’s key vote on the aid package for Spanish banks with a huge majority, suggesting that opposition in Germany to eurozone bailouts is not as virulent as has been suggested. There are worries that Spanish instability could wreak havoc on the German economy and cause systemic problems from the eurozone.

USD

The dollar declined on Thursday and the euro rose to its highest level in nearly a fortnight as US economic data pushed stocks higher, lessening interest in the greenback as risk aversion diminished. Poor US data gave some reprieve to the European currency.

In US data, initial weekly unemployment claims have reached 385,000, well ahead of the 365,000 consensus forecast, while the Federal Reserve Bank of Philadelphia´s July manufacturing sector survey gauge came in at -12.9, after -16 for the previous month (Consensus: -8).

The weak data prompted some investors to believe the Federal Reserve will be more likely to initiate further quantitative easing, although none of the main data points were quite as weak as they first appeared.

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Written by Tom Tong

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