Rajoy denies that Spain on precipice of bail out request as UK construction slows

Tom Tong03/Oct/2012Currency Updates

GBP

The pound snapped a two-day decline yesterday against the dollar as a report showed an index of U.K. construction contracted at a slower pace in September.

Sterling fell to a three-week low against the dollar today ahead of a key data release that is expected to show growth in the UK’s dominant services sector slowed last month. The report today will show the U.K. services industry expanded for a 21st month in September, according to the estimate of 29 economists surveyed by Bloomberg News. That figure is out at 9.30am today.

Furthermore, house prices unexpectedly fell in September, data from mortgage lender Nationwide showed on yesterday, adding to a recent string of disappointing economic news.

EUR

The relief rally in EURUSD continued to take shape as it hit a fresh high, but we may see the euro-dollar threaten the upward trend carried over from the end of July amid the heightening risk for a Greek default.

As Greece struggles to secure its next bailout payment, there’s talk that European policy makers will extend the deadline for the region to meet its budget target, while we’re seeing speculation that the European Central Bank may push its Greek debt holdings to the European Stability Mechanism amid the growing threat for another credit event. As the debt crisis continues to dampen the fundamental outlook for the euro-area, the governments operating under the fixed-exchange rate may put increased pressure on the ECB to expand monetary policy further, and the Governing Council may now look to target the benchmark interest rate as the economy faces a deepening recession.

Although the ECB is widely expected to maintain its current policy in October, it appears that a growing number of central bank officials are showing a greater willingness to lower borrowing costs further, and the rebound in EURUSD may be short-lived as market participants raise bets for a rate cut. As EURUSD maintains the range carried over from the previous week, it looks as though the exchange rate will continue to track sideways going into the ECB rate decision.

In short, there are signs of economic weakness in Europe which is adding pressure on central bank policy makers meeting this week to consider fresh easing steps.

USD

The pound made little gains over night as the British Chamber of Commerce warned that the ‘economy has been stagnant for too long and urgent measures are needed to enable businesses to drive a sustainable recovery’.

Further movements this week will depend on the markets view on the prospect of further QE in the UK this month and the crucial Non Farm payroll figures our of the US on Friday.The ICE dollar index which measures the dollar against a basket of six other currencies, rose to 79.840, from 79.735 in North American trading late Tuesday signalling a swing in risk appetite and suggested further dollar strength today. The euro strengthened briefly against the Dollar on Tuesday, after Spain’s Prime Minister Mariano Rajoy denied that his country was about to ask for aid from the European Union but any strength is likely to be tested today as the market doubts the truth of this rhetoric.

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Written by Tom Tong

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