Spain credit rating downgrade hurts Euro

Today's Highlights

  • US growth data nervously awaited  

  • Sterling remains strong but beware of profit taking

  • Spain credit rating downgrade hurts Euro

FX Market Overview

Sterling continued its consolidation at the top of its trading ranges yesterday. It nudged a fresh high for the year against the US Dollar and trickled back towards the year’s high against the euro and the Australasian Dollars. This in spite of Bank of England Monetary Policy Committee member Martin Weale suggesting the negative GDP data suggests further quantitative easing may be required. It would seem that when traders look around the world at currencies they would prefer to buy than sell, Sterling is in the former and not the latter column. The lack of UK data today leaves the Pound vulnerable to profit taking and a short term correction so those needing to buy Sterling could get their chance today but I would recommend using market orders to automate trades rather than trying to catch the market plumb at the bottom; this could be a very swift dip.

European data did little to help the Euro yesterday. French unemployment data was very disappointing; I bet that didn’t go down well in the Sarkozy camp. Spain saw its credit rating slashed by two notches; as they already struggle to borrow at reasonable rates, they needed that like a hole in the head. Italian bond yields rose but not as fast as Spain’s but on the positive side, it looks like Holland will agree a series of austerity measures in spite of the cabinet resigning and Portugal is saying they won’t need further bailout funds. With so much conflicting data, the euro was left to drift; it strengthened against a weakening US Dollar and it weakened against a strengthening Pound. A lack of Eurozone data today is likely to produce more of the same but, as with the Pound, some element of profit taking is likely as we head towards the end of the week and the month.

Yesterday’s US weekly unemployment report was marginally worse than expected and that unsettled the US Dollar which had been benefitting from generally more upbeat data in recent weeks. Traders were hesitant about getting heavily involved in USD sales though ahead of today’s release of the quarter 1 economic growth figures. The Q4 spike to 3% always had the feel of an aberration and a correction down to 2.5% is forecast for this set of numbers. Any better and we may see the US Dollar recover its composure but a worse figure will leave the USD exposed to a potentially game changing sell off. At the moment, $1.6250 appears to be the technical top in the Sterling - US Dollar exchange rate and we could conceivably see that failing if the US growth data prints lower than 2.25%. We will know at 12:30 GMT.

As for the commodity-reliant currencies, well it has been rather a quiet week on that front but a strong round of corporate results has lifted spirits in the equities and commodities markets so the weakness we are witnessing in these currencies may not continue apace. After New Zealand’s central bank made it clear interest rates are on hold for a while to come while Australia’s central Bank is set to cut their base rate on May 1st and the Bank of Canada is hinting at interest rate rises, there may be a divergence in these currencies which have tended to track each other over the last few years.

But we don’t care about all that do we. We have a weekend to prepare for. Sadly as far as the UK is concerned, that preparation may involve gumboots and sandbags as Mother Nature toys with us in ironic fashion during the hose pipe ban. Those of you in warmer climes are not allowed to get all smug by the way. I hope yours is a good one, whatever you are doing.

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