There has been no change in sentiment towards the euro at the start of this week, with the much publicised political turmoil in Greece continuing. We have covered these issues in great detail over previous reports, so won’t touch in it again. In addition to this, ratings agency Moody’s also downgraded a total of 26 Italian banks last night, highlighting that the debt issues on in the euro zone continue to spread, with Spain and Italy particularly vulnerable at present. This caused the rate for EUR-USD to break below $1.2850 to a low of $1.2820 and GBP-EUR to break above €1.25 for the first time since the end of 2008. |
There has been some respite for the euro this morning with the release of German GDP figures earlier this morning printing at 0.5%, well above the expected level of 0.1%. Even through the euro has rallied on the back of this, it hasn’t gained as much ground as would normally be expected given the size of the increase. It is expected that investors will see this brief euro rally as a selling opportunity, as the single currency hasn’t broken back through any key levels as of yet. The expectation is still that the rate for EUR-USD will continue to move lower, targeting $1.2625
Sterling posted gains across the board yesterday afternoon, benefitting from flows out of the euro to move higher against the dollar. Having again bounced off $1.6050 in early morning trading the pound has moved back to $1.61 this morning. Expectations are that any rallies will be short lived and $1.6050 will be tested again this week. Due to further woes coming out of Greece, it looks increasingly likely that if this pair does breakout of this range it will be to the downside, as the current level of risk aversion looks likely to continue in the short term at least, with the pair being dragged down by the EUR-USD rate.
Sterling managed to break through €1.25 against the euro yesterday afternoon, and although we have given back some gains this morning after the better than expected German GDP data, the rate is still holding above this level this morning. Now that we have broken above €1.25 we could easily see the pair move higher, potentially all the way to the November 2008 highs of €1.2745, although there are numerous level of resistance before we get there. The euro will not continue to weaken forever, with some analysts split of the reaction if Greece does leave the euro, which could well be viewed as a long term positive for the single currency. Some major European banks are calling for the single currency to make a recovery by the end of the year, once the current issues with Greece are resolved one way or another.
The commodity currencies have continued to struggle with the current levels of risk aversion, with the Ozzie in particular falling out of favor. The continued rally in the Australian dollar over recent years has primarily been fuelled by increased demand from China. Now that this has slowed down, with China announcing further monetary easing over the weekend, it would not be surprising to see the Ozzie continue to slide.