EUR honeymoon comes to an end as its back to reality in the Eurozone

• EUR falls at hardest level in 8th

• Poor manufacturing data posted for Europe

• Spanish woes continue

• Initial jobless claims fall by 3k

That all too familiar feeling of one step forward and two steps back, is beginning to resonate in the air once more. It looks like the honeymoon period EUR was enjoying since Draghi’s intervention two weeks ago is coming to an end. Drinks by the pool and dining under the star speckled sky is slowly being replaced by civil strife and unrest as it looks like the natural order is returning to the Eurozone. Thursday saw EUR fall at its hardest levels since the 8th of August against both USD and GBP.

Poor manufacturing data for the Eurozone and its core member states continued to show contraction, as the widespread slow down continues. Germany and the Eurozone itself did show signs of improvement since last month, but contraction none the less. Markets seemed disappointed that business confidence wasn’t lifted by the ECB’s intervention to alleviate the debt crisis. Personally I don’t see how it would, but EUR is looking to ride any wave it can these days. Eurozone consumer confidence levels are currently at their lowest since 2009. GBPEUR was helped higher by slightly better than expected UK retail sales (-0.2% vs -0.4% exp). The Olympics was always expected to keep people off the high street, so no real surprise there.

The closely followed Spanish debt auction yesterday morning saw Mariano Rajoy kick the bailout can down the road a little further. A well subscribed sale on 10 year debt saw yields fall to 5.67% with the bid/cover ratio a sturdy 2.8 times oversubscribed. Spain’s hesitation to take the plunge is almost starting to frustrate the markets. By the close of business, yields had already crept up to 5.82%, closer to the new 6% danger level where we were earlier this week. Private sector woes got involved as figures were bandied around to the tune of 70-80 bn Euro for the Spanish banking system. The chairman from Spain’s BBVA said that that the banking system was still in distress. With the Spanish “bad bank” not likely to come into effect this year, we expect to see the banking system continue to struggle, adding to bailout pressures.

Draghi did his best to stabilise the EUR and we did enjoy a more lengthy period of stability, but in an all to familiar tale the struggling peripheries are coming undone at the seams.

Across the pond, initial jobless claims fell by 3k but still short of the targeted reduction of 10k for the month. GBPUSD traded within a 60 pip range for the day. The overnight Asian session has pushed cable higher above the1.62 levels, cancelling out the gains USD made the session previous. USD made better ground against EUR which now sits pretty, below the 1.30 level.

Quiet day today on the data front with nothing of significance due out. We expect to hear further developments on Spain and Greece but all in, all a relatively quiet day.

Have a good weekend.

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