Pain in Spain

Worries over the debt situation in the Eurozone have escalated and affected sentiment towards the Euro, after S&P lowered Spain's long-term and short-term sovereign credit rating, citing "a challenging fiscal outlook". Yesterday’s fall in Eurozone economic confidence has added to the concerns surrounding the region. Meanwhile, the Pound was initially supported by a flat reading on consumer sentiment. Yesterday’s dismal data on retail sales and mortgage approvals seems to have left lingering doubts regarding the state of domestic economic recovery. Market participants are likely to focus on the Italian bond auction and the US GDP growth report today.

Pound Sterling – UK Markets

The Pound has advanced against the Euro, after fears over Spain’s fiscal situation re-emerged, following S&P’s downgrade of Spain’s credit rating. Yesterday’s downbeat data has reignited fears surrounding the recovery in the UK economy. A drop in the retail sales balance and an unexpected fall in mortgage approvals have focused attention back on the consumer, even as consumer confidence remained unchanged in April. There is now increased expectation for further easing, with the Bank of England (BoE) Monetary Policy Committee member, Martin Weale, supporting the case for more quantitative easing, citing the first quarter Gross Domestic Product (GDP) numbers. With no releases for today, the Italian auction and US GDP figures are expected to set the trend in today’s session.

US Dollar – US Markets

The US Dollar continues to struggle this morning against the majors after worries about the global economic recovery resurfaced. Economic data across the globe, including the US, was mostly disappointing. A lower than expected fall in initial jobless claims has brought the labour market back into increased focus, while readings on manufacturing in Kansas City and the Chicago Fed National Activity Index raised worries over industrial activity. A silver lining was provided by the rise in pending home sales and mostly robust corporate results. After a dismal UK GDP report, investors await US GDP data today with increased interest. Though there are no fears of a recession in the offing, the headline figure is likely to indicate a slower pace of growth in the first quarter. Nevertheless, the Core Personal Consumption Expenditure and Reuters/Michigan Confidence report slated for release later today, are expected to be largely upbeat. These economic releases are likely to dominate the US Dollar’s movement today, coupled with the resultant risk sentiment from the outcome of the Italian bond auction.

Euro – European Markets

A downgrade of Spain’s sovereign credit rating by the S&P, the second time in a year, weighed heavily on the Euro this morning. Additionally, the agency signaled chances of a ratings cut for Ireland in 2012 or 2013 and further downgrades for Spain. The fall in economic confidence in the region indicates that the current sovereign debt problems surrounding Spain have started affecting consumer sentiment in the region. Data released this morning shows that even consumer confidence in Germany dropped for May from the previous month, against expectations of a rise. Worrying signals from Europe’s political arena continues as the German Chancellor, Angela Merkel, rejected French Presidential candidate, François Hollande’s plan to renegotiate the EU’s fiscal pact. Italy prepares to sell up to €6.25 billion in its debt auction today. The borrowing costs in today’s auction are expected to reveal market appetite for riskier assets following the Spanish downgrade.

Other Currencies – Highlights

Mounting concerns over the European debt crisis led the Yen to climb against the high yield currencies this morning. The currency remained unperturbed, despite the Bank of Japan’s (BoJ) decision to boost its government bonds purchase program by an additional ¥10 trillion. A slew of data released this morning in Japan was mostly negative. However, the central bank upwardly revised its forecast for the country's economic growth in fiscal 2012 and 2013 and retained its key interest rate at 0.10%. The Italian bond auction sets the tone for risk sentiment in today’s session and will determine the movement of the Yen against its higher risk peers.