Foreign exchange markets changed direction after European leaders, speaking on day one of the EU summit, gave investors the feeling that they still have no clear direction on the long-term fiscal outlooks for both Spain and Greece. The euro and other currencies labelled as risky subsequently fell, and the US dollar stood taller, which is a development that could easily accelerate after a second round of discussions. If politicians fail to assure traders that this summit will bring into play well-built and clear ways out of the debt crisis, the mood across financial markets could turn sour very quickly and hurry traders back into safe-haven assets as a result. Sterling is already in trouble, unhinged by technical dynamics which forced the British currency to new four-month lows against the euro. The fall came despite a strong UK retail sales data release which perhaps put Britain’s economic revival on a more sustainable path.
Sterling
Technical factors eclipsed better-than-expected UK retail sales data to send sterling lower. The closely-pegged euro and Swiss franc doubled up on the pound and both broke key price levels to hit fresh four-month highs against the British currency. The pound could repair itself quickly though if public borrowing figures better position the British government’s austerity plans.
US dollar
The US dollar breathed a little easier and even managed to register notable gains against the euro as investors, trying to examine developments at the latest European summit, took a more vigilant approach to trading. The US currency may even finish the week on a much stronger note after France and Germany gave investors no lead on whether Spain will take a bailout or not, although further comments are expected.
Euro
Eurozone politicians promised to have a banking supervisor, led by the Europ-ean Central Bank, set up by January 2013, but the euro fell after France and Germany clashed over when the ECB will actually be able to use the function to help deal directly with Spain’s broken banking sector. The euro drew continued support earlier after Spain managed to sell new government bonds under stress-free conditions, maintaining hopes that a bailout for Madrid in the future may not be as chaotic as some economists initially envisaged.
Japanese yen
Encouraging economic data from the major economies has put under pressure the Japanese yen, with the latter recording a sequence of non-stop declines that has taken the East Asian currency into two-month and five-month troughs versus the US dollar and euro respectively.