Dollar slips while Spain gets ready for auction

As many days as the FX markets are consumed by the binary mentality between risk on and risk off, QE on or QE off, they also come across days when it is simply on or off. Yesterday was the latter with pairs trading listlessly and with no real direction. It was a slow news day all round and I think traders were glad for it following a couple of bloodbaths in recent weeks.

The 2nd half of Ben Bernanke’s latest testimony to Congress didn’t really add too much to the markets’ understanding of how likely further asset purchases would be from the Fed but we have remained in a general dollar depreciation trend that suggests the market is still looking for the lever to be pulled sooner rather than later. GBPUSD is 30 pips higher in the Asian overnight session with EURUSD posting a similar increase following a Beige Book release from the US that emphasised the ‘tepid’ nature of the US recovery.

The Bank of England would love to be able to call the UK recovery ‘tepid’ but instead signalled in the latest minutes that growth was likely to be non-existent through 2012. This meeting saw an additional £50bn of asset purchases voted through and, as we expected, there were calls for an additional figure of £75bn, although this got little love as most believed the additional “Funding for Lending” scheme to also be enough. One thing that did surprise us was the Bank suggesting that a rate cut in the UK may be on the horizon once these additional measures have been assessed. This clipped sterling’s wings early on as traders priced in a cut for around 9 months’ time.

Unemployment also dipped in the UK to 8.1% from 8.2% and, although we in the economics game can be guilty of trampling on the green shoots occasionally, this is not beginning of a trend. We believe that the dip in unemployment is down to short-term temp jobs and therefore is unlikely to last post Olympics and through a continued slowdown in the 2nd half of the year.

Elsewhere the IMF was repeating calls for the ECB to open the liquidity taps and get a true “lender of last resort” going. Unfortunately there’s a lot of EU legislation that explicitly stipulates that this cannot be done and you can be sure that if Angela Merkel’s attitude to Eurobonds was “not in her lifetime” then the ECB opening the taps will be viewed in the same way. There is a lot of political action in the EU today with both German and Finnish parliaments debating the finer points of the bailout to Spain.

Spain saw protests over the weekend by public sector workers against the most recent austerity measures and further pain may be on its way in the form of bond auctions today of around EUR3bn. Yields remain close to the 7% mark at the open this morning, and have been increasing since the market realised that the latest banking bailout for Spain was nothing more than another Euro-fudge.

Apart from that auction we will be looking to see whether UK consumers have kept their hands in their pockets pre-Olympics, having spent a fair bit during the Jubilee celebrations. As we told you yesterday, the unexpected fall in inflation was mainly as a result of heavy discounting by clothing retailers; we will find out today whether the discounting was successful.

Indicative Rates Sell Buy
GBPEUR 1.2722 1.2756
GBPUSD 1.5674 1.5699
EURUSD 1.2300 1.2322
GBPJPY 123.11 123.38
GBPAUD 1.5056 1.5083
GBPNZD 1.9540 1.9570
GBPCAD 1.5818 1.5848
NZDUSD 0.8012 0.8032
GBPZAR 12.73 12.78
USDZAR 8.1186 8.1475
GBPPLN 5.2870 5.3145
EURJPY 96.62 96.89

Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered. Rates are dependent on amount transacted. It is important to remember that foreign exchange rates fluctuate all the time. The rate you will receive will depend on the amount and currency you require.

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