Rajoy wins support in Spain as risk aversion declines

Tom Tong23/Oct/2012Currency Updates

GBP

Sterling slipped to a five and a half-month low against the euro on Monday as the single currency rallied broadly after a victory for Spain’s prime minister in a regional election. However the pound firmed against the dollar as investors looked to preliminary growth data due on Thursday that may point to a solid UK economic recovery. The euro rose against the pound to its strongest level since early May. Market players turned their attention to Thursday’s UK GDP data, forecast to show the economy recovered to grow by 0.6 percent quarter-on-quarter in the third quarter after three quarters of contraction. If the figures show a solid UK recovery this would lift the pound.

Strategists say sterling could be muted ahead of the numbers and take direction from developments in the eurozone, although investors will also have one eye on a speech by Bank of England Governor Mervyn King on Tuesday. Traders will be looking to see whether King gives any clues on the possibility of further monetary stimulus next month. Better-than-expected public sector borrowing and jobs data last week dampened expectations that the BoE will embark on a further round of asset purchases, or quantitative easing (QE), in November. QE is generally seen as negative for a currency as it increases its supply.

EUR

Spanish Prime Minister Mariano Rajoy won backing on Sunday in elections in his home region of Galicia, a boost for his austerity-focused government that removed a potential obstacle to him asking for a bailout. Expectations that Spain will apply for financial aid, prompting the ECB to start buying its bonds, have helped support the euro in recent weeks, although uncertainty over the timing of such a move has limited the gains. Moody’s downgraded 5 Spanish regions last night, pouring cold water over the upbeat mood seen on Monday after President Rajoy’s party won the regional elections in Galicia. The euro spiked against the dollar in yesterday’s session, although the impetus waned soon after.

USD

The dollar began to decline in value after gaining ground last week but found traction bolstering the safe haven currency on what appeared to be the beginning stages of risk aversion. In the early hours of the European market open on October 16, rumours spread through the newswires reporting Spain may gain access to an additional line of credit prompting traders to unload holdings in dollars and take on additional risk in higher yielding assets. The Spanish bailout talks appeared to have provided enough fuel to push the greenback lower throughout the next 33 hours of trading until technical support was found on October 17 at a rising trend line, prompting FX traders to ease their selling efforts. The newly established bidding effort into the currency gained traction as U.S. initial jobless claims disappointed, reporting 388,000 new workers lost their pay, highlighting sluggish labour growth efforts and potentially fuelling speculators fears that another round of risk aversion may grip market sentiment. A few hours later Google reported earnings and missed heavily, possibly providing the catalyst market participants needed to begin unloading risky positions, as seen in the S&P 500’s decline. Looking ahead, on October 24 the Federal Reserve will provide their rate decision where changes to current monetary stimulus efforts are not likely. On October 25 the Chicago Fed will release its National Activity Index and durable goods along with weekly unemployment claims figures are scheduled for release.

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Written by Tom Tong

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