Markets continue there optimistic trend as speculation of the Spanish bailout still looms

Tom Tong17/Oct/2012Currency Updates

GBP

Sterling rose against the dollar on Tuesday as demand for perceived riskier currencies improved, although it lagged against the euro on concerns that slowing UK inflation will give the Bank of England more room to ease policy.

Consumer price inflation in September rose 0.4 percent from a month ago, in line with expectations, but slowing from a 0.5 percent rise in August. For the year, inflation rose 2.2 percent in September, lower than the 2.5 percent annual rise seen in August but is in line with forecasts. Due to the fact that Tuesday’s date was so in line with expectations we did not see the volatility the markets were expecting.

The pound is very sensitive to big data surprises. If we get a miss (on employment data) it would be very negative for sterling. Of late, the jobs market in the UK has shown signs of a recovery despite a recession. Analysts expect the jobless rate to remain steady at 8.1 percent for August when data is released on Wednesday. However, concerns are also gaining pace over important data due later in the week such as retail sales figures as well as Bank of England (BoE) minutes today – this may add to the risk of the central bank opting for more asset-buying quantitative easing (QE) next month.

EUR

The euro rose to a one week high against the dollar on Tuesday following speculation that Spain is moving closer to asking for a bailout. The single currency was 0.5 percent higher, rising to a one-month high with resistance at its 200-day moving average, as it continued to hold well above chart support helped by an improvement in the German ZEW’s economic sentiment, which saw the reading of -11.5. This was higher than the expected reading of -14.6.

Rumours about Spain fuelled most of the euro’s gains on Tuesday. A formal Spanish aid request would initiate the European Central Bank Spanish bond buying which would lower the nation’s borrowing costs. However, whilst reports circulate that Spain is moving closer to a bailout, much uncertainty remains.

USD

The dollar weakened yesterday against the euro and sterling. This was partly due to better than expected German ZEW economic survey, but also on rumours that Spain might finally request a bailout come November. In the US data was mixed. Core CPI failed to meet expectations and showed that the inflation rate was only at 0.1%, although 0.2% was forecast. Today, the Greenback’s price action will depend on the result of the building permits and housing starts which is scheduled to publish at 12:30. If they come in better than expected, we could see another risk rally.

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Written by Tom Tong

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