Euro Bears Firm Their Grip

With the Spanish 10 year bond yield hovering at Euro-era highs, risk aversion remains the order of the day over persistent fears that Spain is on the brink of seeking more assistance from the Eurozone. Reports indicating that Greece might not receive further aid from the IMF have made matters worse. Meanwhile, traders are eyeing second quarter UK GDP data mid-week, which is expected to reveal a recessionary trend as an extra holiday in the previous quarter proved a major drag on economic performance. In today’s trading session, the Eurozone consumer confidence and the Chicago Fed national activity index are expected to offer further direction to risk sentiment.

Pound Sterling – UK Markets

On Friday sterling weakened against the US Dollar, but strengthened against the Euro, amid concerns over the Spanish fiscal situation. The Pound has climbed to fresh multi-year highs against the Euro in today’s trading session on worries that soaring borrowing costs in Spain could force the nation to seek further aid from other Eurozone nations, to tackle its debt problem. Additionally, reports suggesting that the IMF might not provide more aid to Greece further prompted traders to shun the Euro. However, the Pound has started today’s session on a weak footing against the greenback, as the GDP data scheduled later this week is expected to indicate that the UK economy failed to recover from its first double dip recession since 1975, partly owing to an extra bank holiday for the Queen’s Diamond Jubilee celebrations in June. Amid prevalent worries over Britain’s growth, the latest government borrowing data also failed to offer solace. Data released on Friday revealed that the UK government borrowed more than expected in June, thereby strengthening beliefs that the Chancellor is on course to miss his deficit reduction target this year.

US Dollar – US Markets

Growing risk aversion among market participants drove the greenback higher against its major peers in today’s trading session, as Spain’s 10 year bond yield moved above the 7% mark and climbed to a Euro-era high on concerns that more regional Spanish governments might be forced to seek aid. Moreover, hopes of China staging a recovery in the current quarter faded, after a Chinese central bank adviser predicted the nation’s economic growth could slow to 7.4% in the third quarter. Despite a strong start to this week’s session, traders are expected to closely monitor the second quarter US GDP data and the durable goods orders for June, scheduled for release during the latter half of the week, to gauge the prospects of a new round of easing for the US economy. Furthermore, regional manufacturing indices, scheduled for release during the course of the week, are expected to offer hints on the performance of the US economy in the initial phase of the third quarter. With the Chicago Fed’s national activity index being the only economic indicator on tap today, market participants are expected to set their sights on news flow from Europe for more cues on risk sentiment.

Euro – European Markets

The Euro has slipped against its major counterparts this morning on the looming threat of Spain demanding a full blown bailout, as the nation’s 10-year bond yields hit record highs in today’s trading session. Disappointing news continued to emerge from the debt laden nation, as Murcia joined Valencia in seeking aid from the central government. Moreover, reports indicated that more local authorities have expressed their willingness to follow in the footsteps of Valencia. Meanwhile, Greece has returned to the spotlight amid reports that the IMF might stop paying rescue aid on prevalent doubts over the nation’s ability to meet its debt reduction targets. This has shifted focus to the visit of Troika officials to Athens tomorrow, to assess the country’s progress in meeting its bailout targets. With Euro-area worries being the key driver for risk appetite, markets are also expected to pay modest attention to Eurozone consumer confidence data due later today, which is expected to indicate further deterioration for July.

Other Currencies – Highlights

The Japanese Yen has climbed against the major currencies and surged to the highest level against the Euro in more than a decade as Spanish borrowing costs climbed to Euro-era highs, reigniting market fears ahead of the Spanish bond auction due tomorrow. Moreover, reports indicating that the IMF might halt offering aid to Greece have heightened concerns ahead of Troika’s visit tomorrow. Meanwhile, the Japanese government, in its monthly assessment of the overall economy, indicated that Japan's economy continued to recover led by strong consumer spending and reconstruction after last year's earthquake. However, the government highlighted that signs of a slowdown in overseas economies posed risks to economic recovery. On the data front, supermarket sales in Japan continued to decline for June. With no major set of economic releases due during today’s trading session, news flow emanating from the Eurozone is expected to remain the focal point among traders.