Headwinds Intensify on the Euro zone - US Dollar still safe haven currency of choice
Last week’s no-solution in forming a Greek parliament still troubles the Euro zone and the case for more austerity meets resistance among the European citizens. EUR fell for the third week in a row against its major peers. This week, markets will focus on series of bond auctions and if demand is falling significantly, we could see rates increase even more. Monday, Spanish rates hit 6.2% for the first time in 2012. In the UK, keep an eye on the quarterly inflation report on Wednesday.
The amount of negative news for the Euro zone is mounting and investors are becoming more risk averse as the debt crisis is far from settled. Last week, the weighted index for the US dollar rose for a second week in a row, while showing a retreat for the EUR for the third consecutive week.
Seeing through the cloud of negativity, the good thing from Monday is that the crisis in Spain so far has not reached Italy, when measured in the results of the auctions. On the negative side, the Spanish banks borrowed a record €263.5bn from the ECB in April. This week is massive in regards to debt auctions and Tuesday’s auction in Greece could trigger more concerns as it has been reported that the government has not taken decision on repayment. In Greece, despite the political tension where close to 70% of voters support non-bailout parties, a survey showed that nearly 80% supports Greece to stay in the Euro – a task that will be difficult to solve for the next Greek government.
As the US dollar continues to be bid, commodities are also falling in value. Gold has erased its 2012 gains and Crude oil is back below the $100-mark per barrel. In addition, US 10 year treasury futures climbed on Monday to new record highs at 133 10/32. Last week, EUR/USD extended the drop 1.3% and is currently trading below the 1.29-figure. If we see a break of 1.2850, this gives scope for a test of the 1.28-figure.The pair needs to close above 1.30 to if we are to establish a bullish scenario.
In the UK, Wednesday’s quarterly inflation report will be key. The GBP has been recently subject to a safe haven status due to the actions from the Bank of England in keeping monetary stimulus at ease and the government being able to keep fiscal worries contained. However, energy has kept inflation elevated and above the forecasts. If the report contains a more hawkish stance than expected, then we should see EUR/GBP continue on the offer. Currently the pair has found support at the psychological 0.80-level, but a weekly close below this level could open up for a test of the 61.8% Fibonacci-level at 0.7785. With an Average True Range on a monthly basis of close to 380 pips, we could see this happening before Q3.
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