The market’s unrelenting desire for a Spanish bailout caused
consistent euro strength yesterday. A suggestion that Spain could receive a
precautionary credit line from the Europe’s rescue fund spurred investors to
take riskier positions in the currency.

The market’s unrelenting desire for a Spanish bailout caused
consistent euro strength yesterday. A suggestion that Spain could receive a
precautionary credit line from the Europe’s rescue fund spurred investors to
take riskier positions in the currency.

Not an unfamiliar position, we have previously seen rumour
after rumour energise the euro as investors covet their long awaited bailout,
only for a realisation of Spain’s divergent attitude cause investors to
retreat. The difference in this instance is that the idea was floated by German
officials, who previously were against such measures.

The euro saw strong gains against most of its major
counterparts, with the yen and dollar safe havens unravelling on the notion,
whilst it also gained against sterling.

In the UK, data released showed that the economy’s inflation
rate fell to 2.2%, close to the Bank of England’s 2% target. Potentially acting
as the catalyst, this result could cause the bank to loosen monetary policy
conditions, through the form of further stimulus or a rate cut, speculation
which contributed to the pound’s weakness against the euro.

Last night, Moody’s opted to keep Spain’s rating a level
above junk bond status, citing the efforts of the government to curb the debt
problem and the insulating support of the ECB and EU. The news caused an
instantaneous strengthening of the currency, which has levelled since, though
further optimism could prompt more euro strength against the dollar and
sterling.

 

Key Announcements
Today:

• 09.30am – GBP – Claimant Count Change: reduction by 0.2k
• 09.30am – GBP – MPC Meeting Minutes
• 09.30am – GBP – Unemployment Rate: expected to remain level
  at 8.1%
• 13.30pm – USD – Building Permits: expected rise to 0.81m
• 13.30pm – USD – Housing Starts: increase to 0.77m