Yesterday belonged to the euro as sentiment
improved demand for the single currency with markets positioning themselves
following news of the Spanish budget and banking stress tests.

Optimistic that Europe is curbing the debt
crisis, investors led a euro rally against almost all of its peers. Once again
sentiment usurped raw data as manufacturing output contracted for the 14^th
consecutive month, albeit at a level marginally better than expected.

Yesterday belonged to the euro as sentiment
improved demand for the single currency with markets positioning themselves
following news of the Spanish budget and banking stress tests.

Optimistic that Europe is curbing the debt
crisis, investors led a euro rally against almost all of its peers. Once again
sentiment usurped raw data as manufacturing output contracted for the 14^th
consecutive month, albeit at a level marginally better than expected.

Gains in the euro were further enhanced
following impressive data from the US’ equivalent manufacturing index, as the
nation returned to expansion for the first time since May. Discontent with
lower yields in the greenback, investors switched to the euro in order to reap
the rewards of a risk-on currency.

The positive steps for the US show an
improving economic health and evidence that the Fed’s continued stimulus is
taking effect. If the data across the pond continues to improve, the euro could
see further gains at the expense of the dollar.

These euro gains are not built on the
quantifiable figures that illustrate strong economic foundations. Instead they
are a result of heightened optimism that the currency will have the means to
get back on course. Looking to the long term, even if the 17-nation euro zone
does return to its former strengths, there is a profusion of obstacles that
European leaders must successfully maneuver in the meantime, which are likely
to weaken the currency in the coming months.

The frivolity of optimism could be exposed later
today following Moody’s suggestion that Spanish banks require more capital than
first reported. In these volatile times, breaking announcements can either
eradicate or inflate market movements over short periods; perspicacious
business owners strike on short-term movements with long-term trends in mind.

In breaking overnight news, the Reserve
Bank of Australia surprised many in opting to reduce the overnight cash rate by
25 basis points to 3.25%. The Aussie showed early losses against its peers on
the back of the decision designed to invigorate growth that has become very
reliant on China’s construction industry.

 

Today’s
Key Announcements:

• 08.00am – EUR – Spanish Unemployment Change:
  increase to 79.6k from 38.2k
• 09.30am – GBP – Construction PMI: Expected
  to increase to parity level, 50
• 10.00am – EUR – Producer Price Index:
  marginal increase expected
• Tentative – GBP – 10y Bond Auction

See previous Daily Market Reports