A strong BRC retail sales figure released has given the pound. Spanish and Italian government yields moved higher, coming closer to levels deemed unsustainable and causing risk appetite to dry up. As a result, the safe haven dollar was the main benefactor.
BRC retail sales figures combined with RICS house price balance could provide some support for sterling. The BRC retail sales figure rose at its fastest pace this year. Further to the BRC release sterling has pared losses made on the US dollar. The upbeat news surrounding the economy has helped sterling capitalise on recent euro weakness and continues to do well against its other major counterparts.
US dollar
The US dollar benefited from hawkish comments from the Federal Reserve. One policy maker said the central bank should consider an exit strategy to is quantitative easing programme in six to nine months time. On the back of the US dollar advance, equity markets nose-dived. Demand for equity has evaporated as investors buy US and German treasury bonds. While the US and German bond yields have declined, the yield on other government debt, notably Spain and Italy have started to climb again putting more pressure on the euro zone, increasing risk aversion.
Euro
The euro has come under increasing pressure as debt woes continue to blight confidence. German bond yields are heading lower, while Spanish and Italian yields are heading higher. The higher Spanish yields come despite the spending cuts in education and health care announced worth €10 billion. The European Central Bank’s Nowotny said that he was not worried by the situation because had taken the “necessary steps”. Nevertheless, govern-ment yields continue to rise to close to six per cent, worryingly close to the seven per cent level deemed unsustainable.
Japanese yen
The yen strengthened as risk aversion continues to dominate. The widening of the yield spread in Spanish and Italian debt as well as falling equity markets is driving investors into safe haven currencies such as the yen and US dollar.