Eurozone debt concerns regain the limelight
From Thursday to the earlier part of this week the euro was generally weaker hitting lows, last Monday, at 1.3428 against the US dollar. Resurfacing eurozone debt concerns weighed on the single currency – as the Egyptian concerns faded away they made way for those concerns that were next in line.
Portuguese bond yields were on the rise as well. The euro was also negatively hit by troubles from the German financial services provider West LB, as the bank is reportedly working on a rescue plan aimed to help it get through.
Despite all this a Spanish auction held last Tuesday went well; Spain auctioned 12-month and 18–month bills. The 12-month bills were auctioned at a yield of 2.410 (vs. 2.947 previous auction) and the 18-month bill were auctioned at a yield of 2.938 (vs. 3.367 previous auction). Demand for the bills was good as well with 2.1 bid-to-cover ratio for the 12-month bill (2.2 previous auction) and 5.3 (vs. 4.1 previous auction) for the 18-month bill.
At their monthly meeting eurozone finance ministers agreed upon the permanent rescue mechanism that will replace the current rescue fund available that expires in 2013. The new rescue mechanism will be armed with a €500 billion lending capacity. However the news failed to be a major market mover due to the fact that no agreement has yet been reached on the current rescue fund.
GDP quarterly figures from the eurozone were a bit disappointing as France reported a growth of 0.3 per cent (expected 0.6 per cent), Germany reported a growth of 0.4 per cent (expected 0.5 per cent), and the eurozone figure came in at 0.3 per cent (expected 0.4 per cent).
In the United States President Barack Obama put forward his plan to cut the US deficit by over $1 trillion over 10 years. The plan vows to be a major issue as Republicans are already voicing their views that the proposed Budget might not be enough.
According to RTFX Trader Tip the EUR/USD currency pair may be attempting a drop lower towards the 1.3350-1.3449 for this current week as long as price trading for the pair remains below 1.3695. Up to the time of writing the pair has traded in the range of 1.3428-1.3558 so far this week. RTFX market trend is neutral, but risks to the downside exist. The pair should find resistance at 1.3695/1.3843 and support at 1.3350/1.3449 for the current week.
Inflation data released last Tuesday from the United Kingdom showed that CPI year-on-year was four per cent, in line with expectations but double the two per cent targeted by the BoE. As inflation data hit the wires the British pound lost ground to the US dollar, falling around 50 pips; despite the data being in line with consensus it probably disappointed those that were expecting the reading to be higher.
Shortly after the release it is protocol that the Governor of the Bank of England writes a letter to the Chancellor of the Exchequer to explain why inflation was high and what was expected to happen. In the letter, addressed to Chancellor George Osborne, BoE Governor Mervyn King said that inflation could rise further in the coming months but that there was uncertainty over the medium term outlook as “inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead.”
Mr King also mentioned that the members of the MPC had diverging views – but he added that members were ready to act if necessary.
As soon as Forex investors had time to digest the data and the letter that followed, the British pound pared losses shortly after and made new intraday highs at 1.6144 against the US dollar up to the time of writing. Mr King’s words were interpreted to mean that the BoE was tending towards small and gradual rate hikes in the near term to be able to maintain the balance of risks.
The BoE monetary policy committee is composed of nine members, to date two members are for raising policy interest rates, one is for resorting to more quantitative easing and the other six are for no change.
Mr King is attributing the rise in inflation to the recent rise in value-added tax, higher commodity prices and the costlier imports on the back of the weaker British pound.
Upcoming FX Key events:
Today: US CPI, US Philadelphia Fed Business Index and EZ Consumer Confidence.
Tomorrow: German PPI, UK Retail Sales, and Canadian CPI.
FX Technical Key points:
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.9200, key reversal point 1.0000.
AUD/USD is bullish, target 1.0300, key reversal point 0.9500.
NZD/USD is neutral.
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Mr Muscat is senior trader at RTFX Ltd.