Spain Euphoria Fizzles Out

The rally in the Euro lost steam yesterday as rising Spanish and Italian bond yields brought the sovereign debt concerns to the fore. The Spanish 10 year bond yield rose above 7%, the most since the Euro was introduced in 1999 and at levels at which Greece, Ireland and Portugal had to request for financial aid. At the G20 meeting, emerging nations, including China and Russia, came out in support announcing contributions to boost the IMF’s crisis firewall. At home, consumer price inflation data released today has shown an easing trend, facilitating further QE by the Bank of England to aid the ailing British economy.

Pound Sterling – UK Markets

The Pound advanced against the Euro in yesterday’s session, as worries over Spain’s fiscal situation overshadowed the positive outcome from the Greek elections held during the weekend. With not much on offer from the macro front, cues from both the sides of the Atlantic are expected to influence Sterling in today’s session. Data just released has strengthened belief that inflationary pressures remain benign, thereby making room for the BoE to increase its asset purchase target in its next monetary policy meeting. The minutes of the central bank’s latest rate setting meeting due for release tomorrow is expected to shed light on the BoE policymakers’ stance on providing additional stimulus. The US Dollar steadily declined against Sterling owing to the uncertainty surrounding the Fed’s two day monetary policy meeting beginning today. Meanwhile, data from ONS revealed that house prices in the UK rose for April.

US Dollar – US Markets

The US Dollar began today’s session on a weaker footing, as the Fed is scheduled to begin its two day monetary policy meeting later today. Hopes of a modest extension of the Fed’s Operation Twist and the IMF’s increased firepower to combat the debt crisis dampened the demand for safe haven currencies in today’s session. Moreover, unanimous agreement by the European leaders to move towards a more integrated banking system to curb the debt crisis has lifted sentiment and sapped out demand from safe assets. The IMF Managing Director, Christine Lagarde, stated that member states had promised a total of $456 billion for its new crisis fund, with reports indicating that China would contribute about $43 billion. Worries on the housing front eased, as data from the NAHB revealed that US homebuilder sentiment nudged upwards in June to its highest level in five years. The building permits and housing starts data scheduled for release today is expected to provide further insights over the nation’s housing sector.

Euro – European Markets

Rising bond yields in Spain outweighed the Greek relief rally and dragged the Euro lower against the US Dollar in yesterday’s trading session. To add to the negative sentiment, the German Chancellor, Angela Merkel, indicated that the newly elected Greek government should not be granted additional budget flexibility. Additionally, data from the Bank of Spain revealed that Spanish bad loans in April jumped to the highest level since 1994. However, the Euro strengthened against the majors this morning as the EU leaders at the G20 meeting vowed to come together to consolidate the financial system in the bloc. Additionally, reports indicating that the pro-bailout parties, New Democracy and PASOK, might agree to form a coalition government today also spurred optimism among traders. For today’s session, the G20 summit is set to be closely tracked for hints on further measures for tackling the Eurozone debt crisis. Moreover, focus also rests on the outcome of Greek and Spanish bond auctions along with German and Eurozone ZEW economic sentiment indices slated later today.

Other Currencies – Highlights

The Aussie Dollar is trading flat against the US Dollar this morning ahead of the outcome of the G20 meeting. Additionally, firm start to the European equity markets has limited losses in the Australian Dollar against the majors. Meanwhile, the minutes of the Reserve Bank of Australia’s latest monetary policy meeting revealed that the decision to lower the benchmark interest rate was “finely balanced”, with weak global economic environment overweighing robust domestic data. The minutes hinted that the central bank’s focus going forward might depend upon global issues rather than domestic issues. With no major domestic economic releases scheduled for today, news flow from Europe is expected to set the trend for the Australian Dollar against the majors. Additionally, the Conference Board and Westpac leading indices in Australia are likely to hog the spotlight during this week.