No Respite in Sight

The latest twist to the Eurozone saga has seen the debt crisis aggravate, with Moody’s downgrading its rating on 28 Spanish banks and Cyprus joining the bandwagon in seeking a European bailout for its ailing banking sector. The Italian and Spanish bond auctions due later today are likely to provide more hints about the worsening European debt crisis. Across the Atlantic, consumer confidence and regional manufacturing index could test risk appetite. In the UK, testimony by BoE’s policymakers is likely to garner market attention, especially of Spencer Dale and Ben Broadbent, who had voted against QE in the June meeting.

Pound Sterling – UK Markets

Sterling has shifted higher against the Euro this morning, amid uncertainty ahead of today’s bond auctions in Spain and Italy and deteriorating conditions in Eurozone peripheral economies. Additionally, fading hopes of major action at the forthcoming EU summit this week also weighed on the Euro. Meanwhile, data just released revealed that UK’s public sector borrowing rose for May, after posting the largest monthly surplus on record last month. Highlighting the dire state of the economy, S&P cautioned that the official UK GDP forecast for 2013 is “overly optimistic” and based on unrealistic expectations. As we approach the BoE’s next monetary policy meeting, today’s testimony of the BoE Governor, Mervyn King and MPC members before the Parliament’s Treasury select committee, is likely to be closely tracked by market participants to gauge the stance that the central bank might adopt in its July policy meeting. Key highlight of the testimony would be the stance of policymakers Spencer Dale and Ben Broadbent, who had voted not to extend QE at the June meeting. With a light economic calendar today, testimony by the BoE’s policymakers and bond auctions in Europe are likely to determine the direction of Sterling against the majors.

US Dollar – US Markets

Yesterday, an unexpected improvement in the Dallas manufacturing activity for June and US new home sales for May, which climbed to its highest level in two years, eased ongoing speculation over QE3. Nevertheless, this had minimal impact on the US Dollar against the majors. This morning, the US Dollar is trading on a weaker footing against the Euro as “risk on” sentiment received a boost following positive German consumer confidence data for July. However, markets seem to be cautious ahead of the bond auctions in Europe and worries surrounding Spain and Cyprus. On the macro front, another set of housing and manufacturing data slated for release today are set to garner increased market interest. The S&P /Case-Shiller home price index is likely to register an uptick for April, while consumer confidence and Richmond Fed manufacturing for June are expected to be largely downbeat.

Euro – European Markets

The Euro has moved above the 1.25 mark against the US Dollar in today’s trading session after data indicated that the German Gfk business confidence unexpectedly improved for July, while the French consumer confidence remained stable for June. However, concerns still persist as Spain’s official request for the €100 billion aid was followed by another round of downgrade of the nation’s banking sector by Moody’s. Elsewhere in the peripheral economies, Cyprus is the latest to request financial assistance from Europe’s bailout fund. Additionally the German Chancellor, Angela Merkel, quashed any lingering hopes for issuing joint Eurozone bonds by terming such an idea as "economically wrong and counterproductive.” The continued German opposition for Euro-bonds has dented hopes of any concrete measures at the EU Summit later this week. The outcome of bond auctions in Italy and Spain later today is likely to be closely tracked, in order to measure the impact of recent news flow on the region’s borrowing costs.

Other Currencies – Highlights

The Japanese Yen has strengthened against the US Dollar this morning after the Japanese Prime Minister, Yoshihiko Noda, secured the lower house approval for the tax increase plan, which marks a significant step towards curbing the nation’s rising public debt. Additionally, market speculation that Japanese exporters would repatriate their overseas earnings before the end of the current quarter also supported gains in the Yen. However, the Japanese finance minister, Jun Azumi, cautioned that the government needs to make sure that the planned sales tax hike does not hurt the economy. Markets fear that failure to tackle the nation’s debt situation could prompt the rating agencies to downgrade Japan’s credit rating, especially after the IMF and the OECD urged Japan to tackle its debt situation more aggressively. On the macro front, data released earlier today revealed that Japanese corporate service prices grew at a slower pace for May, while small business confidence deteriorated for June.