The rotation of risk will continue over the coming days after a relatively stress-free bond auction eased immediate concerns about Italy before US Sequester deadline. The euro rebounded from seven-week lows against the US dollar after encouraging demand for Italian debt suggested markets are currently not entertaining the idea of new distress in Europe’s quest to hold down the debt crisis. However, the US dollar could bounce on safe-haven demand if lawmakers in Washington cannot agree a deal to avert the Sequester, which is threatening the US economy with a hit of automatic spending cuts worth some $90 billion.
Sterling
Sterling wobbled after revised fourth-quarter GDP data confirmed the UK economy contracted by 0.3 per cent, reinforcing growing concerns the Bank of England may begin a new level of monetary easing in the months ahead. Minutes from the BoE’s February meeting recently showed more members of the voting committee, including Governor Mervyn King, calling for an immediate increase in quantitative easing. Sterling could move beyond its two-and-a half-year lows against the US dollar if Washington’s budget battle strengthens the dollar’s safety appeal and, at the same time, markets fret the UK central bank is ready to launch another stimulus package to shore up UK economic growth.
US dollar
Emphasis across financial markets is quickly turning to US Sequester deadline which threatens to upset investors’ confidence by hitting the US economy with a new headwind of automatic government spending cuts. Washington has until today to agree a new framework for long-term spending cuts, or risk the Sequester kicking in and shaking the economy with $85 billion of pre-planned spending cuts.
Euro
The euro settled above recent seven-week lows against the US dollar after a relatively smooth Italian debt sale suggested investors are not panicking about political deadlock in Rome and the sudden rise of parties offering anti-austerity policies just yet. However, the underlying trend for the single currency remains negative due to the elevated level of political risk. That sentiment could gather pace in the days ahead if Italy ultimately decides to go back into another election, opening up the possibility of a new government strongly in favour of scrapping Italy’s recent progress on lowering government debt.