Last week saw two notable announcements; both illustrated
the serious situation in Europe, yet they had diverging effects on the single
currency.

Last week saw two notable announcements; both illustrated
the serious situation in Europe, yet they had diverging effects on the single
currency.

The perception of Spain’s ability to pay its creditors was
downgraded two notches by S&P, this caused an irrational strengthening of
the euro as investors felt it might result in Rajoy’s government hastening the
request for a bailout. However fears of slowing growth in the single union, and
broadly across the world, caused the markets to react a bit more conventionally,
weakening the euro.

The volatile period could well continue this week as
investors look to Thursday and Friday’s EU summit, with finance ministers
discussing the best practice going forward for the euro. Rumour has it Greece
will be announcing a fresh tranche of bailout funds prior to the meeting as
talks resume with the troika. If this happens the euro could see reassurance
and gain ground against the pound through the week.

Despite last week’s downgrade, and with another potential
relegation from Moody’s on the cards, any hope of an imminent Spanish bailout
is just wishful thinking. The required fiscal stringency would be inimical to
the government’s popularity in the upcoming regional elections, whilst the
10year bond auction this week is expected to show yields remaining at
manageable levels for the struggling nation.

Once again the dollar’s role in global currency as the safe
haven will decide its direction this week. All ears will be pressed against the
walls of the EU summit, should announcements or rumours be of a buoyant nature,
the euro’s short-term bullish view will be realised causing the dollar to
weaken off against its counterparts. However waiting on the euro finance
ministers to make impacting decisions is an all too familiar feeling, investor’s
concerns over the slowing global growth could cause euro weakness until a
substantial announcement is made.

 

Key Announcements
Today

• 13.30pm – USD – Core Retail Sales m/m: Slow growth of 0.6%
  expected
• 13.30pm – USD – Empire State Manufacturing Index: improved
  yet still negative sentiment expected at -4.5