Spain Skating on Thin Ice

Market speculation of possible additional stimulus from China has kept risk appetite alive in today’s trading session. However, market concerns over Spanish debt, with talks of a bailout for a leading Spanish bank and the Spanish region of Catalonia running out of debt financing options, have kept a tight lid on the Euro. Across the Atlantic, consumer confidence data due later today is likely to generate market interest, especially after last week’s strong Reuters/Michigan consumer confidence reading. At home, CBI distributive trade survey being the only macro indicator scheduled today, Sterling is likely to track the prevalent risk sentiment in markets.

Pound Sterling – UK Markets

Yesterday, the Pound climbed against the Euro, as Spanish benchmark bond yields edged closer to the 6.5% mark, raising concerns about the contagion effect of the Eurozone debt crisis. However, Sterling was relatively unchanged against the US Dollar. In today’s trading session, the Pound has moved higher against the US Dollar, amid speculation of possible monetary easing from China. However, Sterling is holding flat against the Euro, as optimism over potential Chinese easing offset persistent debt problems in Spain. Meanwhile, market hopes of additional easing measures for the UK economy received a boost, after BoE policy maker, Ben Broadbent, indicated that the British central bank would play its part in managing the shocks, if situation in the Eurozone worsens. The comments have heightened uncertainty ahead of the BoE’s monetary policy meeting scheduled for next week. In today’s trading session, markets are expected to monitor the CBI’s distributive trade survey for May which is expected to provide an updated assessment of retail conditions for the second quarter.

US Dollar – US Markets

The US Dollar recovered from a weak start against the majors in yesterday’s trading session, as the Spanish 10 year government bond yields moved closer to the 6.5% mark, sparking concerns about the health of the major peripheral economies in the Eurozone. Today, the greenback has failed to capitalise on yesterday’s gains against the Euro and has moved lower, following market speculation of fresh monetary easing by China. Meanwhile, mood among traders remains upbeat ahead of the consumer confidence data slated for release later today, as data last week revealed that the Reuters/Michigan’s consumer sentiment index in the US rose to the highest level in more than four years. S&P/Case-Shiller home price index and Dallas Fed’s manufacturing index are other important economic releases on tap today.

Euro – European Markets

The Euro failed to hold on to its early gains against the US Dollar and Sterling in yesterday’s trading session, as Spanish 10 year bond yields shot up after the troubled Spanish lender, Bankia, indicated that it will seek assistance from the state in order to deal with its toxic assets. Additionally, financial problems in Catalonia, Spain’s wealthiest autonomous region, had kept investors risk appetite subdued. Despite the worsening fiscal situation in Spain, Mariano Rajoy, the nation’s Prime Minister, reiterated that Spain will not seek outside support to revive its banking sector. However, the Euro has advanced against the US Dollar this morning amid growing optimism that China might undertake key measures to boost the nation’s economic growth. On the macro front, markets are keeping a close eye on German consumer price inflation data scheduled for release later today. Additionally, the outcome of bond auctions in Italy and France later today could also affect risk sentiment.

Other Currencies – Highlights

The Aussie Dollar has advanced against the US Dollar in today’s trading session after new home sales in Australia, as reported by Housing Industry Association, rebounded for April. However the agency indicated that additional interest rate cuts are required for a sustained recovery in the housing sector. Additionally, market speculation of further monetary easing in China spurred demand for the Australian Dollar. China’s efforts to boost the economy seemed evident after Beijing pledged to speed up approvals for new infrastructure related projects last week and initiated measures to support the nation’s automobile sector. High yield currencies also benefited from improved risk appetite among market participants, with major global equity markets trading in the green in today’s session.