The euro faced a sudden negative reaction and fell sharply against the British pound and US dollar amid political worries in the eurozone’s third and fourth largest economies. The single currency logged its biggest one-day fall in months and may continue to weaken amid Spain’s corruption scandal and concerns Italy’s anti-austerity party is gaining in popularity ahead of month-end elections. The latest headlines from Europe overshadowed the central bank decision in Australia although the Australian dollar is facing pressure after the Reserve Bank of Australia held rates steady but hinted that another rate cut is possible. Investors may, however, pay more attention to UK services data, which is expected to add to speculation concerning Britain’s potential triple-dip economic recession. The US dollar ended strongly on the back of safe haven flows and could take another step forward against the euro if eurozone retail sales figures compound worries about the region’s political health.
Sterling
The pound registered its biggest one-day gain against the euro in months as investors reacted to political headlines from both Italy and Spain, which led to a sudden jump in government borrowing costs for each country. The move has given sterling some much-needed padding heading into important services data, which will give investors a decent idea of how likely it is that the British economy will move back into growth territory following its fourth-quarter decline.
US dollar
Investors moved back into the safety of the US dollar and the greenback may continue to attract defensive currency flows with its main rival, the euro, shaken by fresh political pressure. An unexpected rise in eurozone government borrowing saw global equity markets slump and the US dollar gain by over 0.5 per cent on a trade-weighted basis. The US dollar also rose to May 2010 peaks versus the yen as investors continue to dismantle their yen positions, worried that an upcoming leadership change at the Bank of Japan will accelerate the central bank’s monetary easing.
Euro
The euro fell by as much as 1.2 per cent against the US dollar as Spain’s Prime Minister, Mariano Rajoy, finds himself immersed in a corruption scandal after allegedly taking illegal cash payments. Concerns this could eventually prove to be highly disruptive for a country deep in economic recession saw Madrid’s borrowing rates spike and traders take profit on the euro’s recent surge. Furthermore, in Italy, the anti-austerity Silvio Berlusconi is growing in popularity ahead of month-end elections in Rome. The single currency has made a negative start to the European trading session, suggesting that it is slipping under the eurozone’s latest political uncertainties.