From Russia with Currency Love

Italian bond auction stutters
-Credit Agricole and SocGen are downgraded by Moody’s
-No respite for consumers as UK CPI pushes higher
-UK unemployment out at 9.30am

It has been a rollercoaster ride for the euro in the past 48 hours and the drama is set to continue. All eyes were on the Italian bond auction yesterday and market participants were optimistic of a good result. The Italian government had been in talks with China Investment Corp, the sovereign wealth fund, and the hope was they would make substantial purchases of debt. The bond auction did not go well and the rally swiftly faded.

European equities were sent lower, in particular French banks suffered over growing concerns for their funding positions should Greece default on its debt obligations. Thanks to Merkel’s intervention, the German government cannot mention the ‘D’ word in public, but that won’t make it any less real a prospect.

The day finished on a high amid rumours that Russia may come to the rescue. Alexei Kudrin, the Russian finance minister commented in an interview that Russia may use its international reserves to buy European bonds. However, at the time of writing, ratings agency Moody’s has downgraded Credit Agricole’s and SocGen’s credit, so we could see the single currency weaken further today.

UK CPI was out yesterday morning and came in as expected at 4.5%. Inflation is on the rise in the UK and it is still highly likely the benchmark will hit 5% before subsiding next year. Last month’s rise was largely attributed to clothing and footwear prices increasing, so we are yet to feel the full impact of rising energy costs. The high reading will not affect the BoE’s stance on interest rates and it appears more likely we will see further QE before the year is out.

We have the UK unemployment rate out this morning at 9.30am, which is expected to be bearish for sterling, and has the potential to surprise to the downside.

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