UK Debt Pile Increases

The approval of the Spanish banking bailout by the German constitutional court came as a much needed relief to jittery investors, although rising Spanish bond yields continue to be a matter of concern. Meanwhile, the Finnish vote and the Eurogroup teleconference to sign off the €100 billion Spanish banking bailout hogs the spotlight in today’s trading session. Across the Atlantic, argument for QE3 has become stronger following an array of weak economic data released yesterday. At home, data just out has indicated that UK’s public sector borrowing grew for the second consecutive month, casting doubts over the government’s ability to match its deficit target.

Pound Sterling – UK Markets

The Pound continued its upward trend against the US Dollar in yesterday’s trading session as speculation of QE3 in the US received a boost following weak set of economic data. Additionally, rising Spanish bond yields offered support to the Pound against the Euro. Despite the performance of Sterling yesterday, hopes of the UK economy staging a recovery remains feeble following weaker than expected retail sales last month, despite an extra holiday on account of Queen’s Diamond Jubilee celebrations and falling consumer prices. In today’s trading session, the Pound has moved lower against the US Dollar on waning risk appetite among investors. Data just out has revealed that UK’s public sector net borrowing continued to climb for June, casting aspersions over the government’s plan to balance its budget by 2016-17. With UK’s second quarter GDP data being the highlight during the next week, market participants are expected to tread cautiously as recent economic indicators suggest a recessionary environment in the UK.

US Dollar – US Markets

A raft of dismal economic releases signaled weakness in the US economy and dragged the US Dollar lower against the Pound in the previous trading session. However, soaring Spanish bond yields aided the currency to consolidate gains against the Euro. Yesterday’s data indicating a contraction in manufacturing activity in the mid-Atlantic region and a rise in initial jobless claims confirmed widespread fragility in the domestic economy and further substantiated the Fed Chairman, Bernanke’s stance to undertake steps to spur growth, if required. Hopes of a recovery in the housing market also dampened as existing home sales declined unexpectedly in June. Nevertheless, the US Dollar has regained its lost ground against Sterling while it has continued to edge higher against the Euro this morning. In absence of major economic releases for the day, market participants are set to track developments in the Eurozone for further direction. The second quarter GDP data due next week is also keenly awaited and might lay the groundwork for a potential QE3.

Euro – European Markets

Yesterday, the Euro retreated against its major peers as the Spanish 10 year bond yield hovered close to the 7% mark, intensifying doubts that Spain might fail to avoid a full blown bailout. Meanwhile, the German lower house approval to the €100 billion Spanish banking bailout offered some respite to investors. The Euro is trading on a weaker footing against the US Dollar in this session, while it has gained marginally against the Pound. Data released earlier today revealed that the annual German producer price inflation eased for June. With little to offer in terms of macro releases, market participants keenly await the Finnish vote on the Spanish banking bailout later in the day. Moreover, the Eurozone finance ministers are set to hold a teleconference to provide finishing touches to the Spanish aid package. Traders await a key set of economic releases from the Eurozone including PMIs and consumer confidence data during the next week.

Other Currencies – Highlights

The Japanese Yen has moved higher against the high yield currencies this morning as risk aversion among traders remains the order of the day. Additionally, the Spanish 10 year bond yield flirting close to the 7% mark in today’s trading session have heightened fears that the nation is moving closer to seek a bigger bailout from its European counterparts. In a noteworthy comment, the Bank of Japan (BoJ) Governor, Masaaki Shirakawa, warned that European debt crisis poses risks to the nation’s export oriented economy as it could lead to further appreciation of the Yen. With a light domestic economic calendar today, markets keenly await trade data due next week to gauge the impact of the recent economic slowdown in the emerging nations. Additionally, consumer price inflation data also slated for release next week is expected to offer insights over the stance the BoJ might adopt in its next monetary policy meeting.