UK
The pound started the Tuesday session at 1.2415 against the euro before falling to around 1.2373 after UK Manufacturing Production figures for April showed a fall to -0.7%, down from 0.9% the previous month, well below the consensus of 0%, which could possibly point towards a GDP contraction for Q2.Sterling recovered and progressed further in the afternoon, GBPEUR rose to 1.2480, its highest in nearly two weeks as investors sought alternatives to the euro on concerns about Spain and worries ahead of this weekend’s Greek elections. 1.25 remains a key area for GBPEUR to break, data releases and political announcements will be the main driver over the next few sessions.
Against the dollar, sterling fell in the morning from around 1.5523 down to 1.5446 after the manufacturing data. However trade speculation on the Federal Reserve potentially increasing stimulus, coupled with worse than expected US Economic Optimism data saw sterling gain in the afternoon to 1.5573.
Following a string of recent weak UK data, a growing number of analysts think the BoE could opt for another bout of asset purchases under its quantitative easing programme, possibly as early as next month after agreeing to leave them on hold this month. The minutes from the policy meeting earlier this month are released next week and will give an indication on the current stance.
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WORLDWIDE
The euro fell against most of its major counterparts after the 10 year Spanish bond yields surged to reach a euro-era record and credit ratings agency Fitch cut its assessment of 18 of the nation’s banks amid concern Europe’s debt crisis is worsening. The euro fell to a week low 1.2442 against the dollar after trading around 1.2527, these losses were restricted by the US Federal Reserve situation.
Technical analysts expect EURUSD to fall further after yesterday’s failure to break through 1.2575. A close above 1.26 would suggest a reverse to current falling trend.
Spain’s bond yields rose to a record as Fitch’s prediction that Prime Minister Mariano Rajoy will miss budget-deficit targets stoked concern a €100bn ($124 billion) lifeline for banks won’t be enough to stabilize the economy. The yield on 10-year government debt rose for a third day, gaining 33 basis points to 6.83
Initial optimism after Spain agreed a bailout deal for its banks quickly switched to worries about its long-term access to markets, which weighed on the euro. Investors were also turning their attention to Greek elections, where a victory for far-left anti-bailout parties could push Greece towards a chaotic exit from the Eurozone.
Treasuries fell as the US prepared to sell $32bn in 3-year notes and traders speculated Federal Reserve policy makers may increase stimulus to keep the economic recovery from faltering. Bonds pared losses after Fitch’s rating cuts, renewing the refuge appeal of US government securities. The Treasury will sell $21 billion of 10-year notes today and $13 billion of 30-year bonds tomorrow.
Federal Reserve Bank of Chicago President Charles Evans said he would support a variety of measures to generate faster job growth, underscoring his preference for more stimulus. The policy-setting Federal Open Market Committee is meeting next week as slowing job growth at home and a deepening crisis in Europe weigh on the outlook.
The US saw a 1% decrease in the import-price index, the biggest since June 2010, this follows an unchanged reading in April, Labor Department figures showed yesterday in Washington. Prices excluding fuel fell 0.1%.
The financial crisis wiped out 18 years of gains for the median US household net worth, with a 38.8% plunge from 2007 to 2010 that was led by the collapse in home prices, and further dented by lack of consumer spending which accounts for 70% of the US economy, a Federal Reserve study showed.
The Indian rupee fell after Standard & Poor’s warned the nation may lose its investment-grade credit rating. Slowing growth and political roadblocks threaten India’s BBB- rating, which is one level above junk, S&P said in a statement yesterday.
This morning German Consumer Price index figures showed an on par with consensus figure -0.2% for May, however this was down from 0.2% seen in April but the markets remained steady.
Overnight Japanese machinery orders for April shot up to 5.7%, way above the estimation of 2.1% and far better than the previous months figure of -2.8%
