Spanish Bailout Dust Settles

The euphoria surrounding the Spanish banking bailout seems to have fizzled out as investors await the fine print of the package. Additionally, concerns that peripheral Eurozone economies including Italy, Austria and Cyprus might need aid to shore up their economies has aggravated matters further. In today’s trading session, a raft of bond auctions in Europe and economic releases across the Atlantic are likely to be keenly eyed. At home, dovish comments from a BoE policymaker has strengthened market speculation of further easing for the UK economy. Data just out has revealed a contraction in annual industrial production for May, although at a slower pace.

Pound Sterling – UK Markets

Easing concerns over the Spanish banking bailout, coupled with a supportive set of Chinese data, pushed Sterling higher against the majors in the initial trading session yesterday. However, the Pound reversed its gains later in the session as the initial optimism surrounding the Spanish banking bailout faded. Adding further pressure BoE policy maker, Adam Posen, indicated that he was “too optimistic” when abandoning the push for more stimulus in April. Dovish comments from the policymaker have stoked speculation that more members of the central bank might have voted in favour of additional QE in this month’s rate setting meeting. In today’s trading session, the Pound is holding steady against both the US Dollar and the Euro. Data just released indicated that industrial production in the UK continued to contract, albeit at a slower pace. The Royal Institution of Chartered Surveyors' earlier today revealed that British house prices fell at a slower pace in May. For the session ahead, all eyes are set on the NIESR GDP estimate for May for insights on the broader economic scenario.

US Dollar – US Markets

The US Dollar pared its initial session losses against the majors yesterday amid uncertainty over the details of the Spanish banking bailout. Moreover, an absence of significant macro indicators led the greenback to be dominated by developments in the Eurozone. However, the US Dollar is holding steady against the Pound and the Euro this morning. Fed policymakers continue to offer mixed signals over the stance that the central bank might take during the course of the year. The Chicago Fed President reiterated his dovish stance, while the Atlanta Fed President opined that he was not convinced that the current economic circumstances support calls for further easing. Today sees the release of NFIB small business optimism index for May and the IBD/TIPP economic optimism index for June and are likely to signal deterioration in overall sentiment. However, all focus rests on the Federal budget balance which is expected to indicate a wider deficit for May.

Euro – European Markets

Yesterday’s initial rally in the Euro fizzled out later in the session, as excitement over the Spanish banking bailout ebbed amid ambiguity over the terms of the deal. Moreover, market participants feared that Italy would be next in line to seek an aid package, as evident from the rising benchmark bond yields. Additionally, markets remain wary of the debt crisis spreading to other vulnerable nations, including Austria and Cyprus. In today’s trading session, the Euro is holding flat against the majors. Hopes of a deeper fiscal union among Eurozone nations strengthened after the European Commission President, Jose Barroso, indicated that the EU banking union could be enacted by next year. A raft of European debt auctions due later today is expected to provide some direction to the Euro in this trading session. Additionally, elections in Greece over the weekend also occupy investors’ minds, as polls continue to suggest that it might be a close contest.

Other Currencies – Highlights

In yesterday’s trading session, the Kiwi Dollar took a hit against the US Dollar as optimism surrounding the Spanish banking bailout news faded and sapped out demand from high yield currencies. However, the Kiwi Dollar has recouped its losses this morning and is trading higher on the back of upbeat housing data. The Real Estate Institute of New Zealand (REINZ) reported that home sales in the nation surged for May. A crucial set of data, including the Reserve Bank of New Zealand’s interest rate decision and the Performance of Manufacturing Index, features on the calendar later this week and is expected to provide further direction to the Kiwi Dollar against the majors.