Bond Yields Weigh On The Euro, While QE Weighs On Sterling

22 June, 2012

Simon Eastman

Thursday’s trading amongst the majors was very much led by investor sentiment towards the Euro. Spain held another bond auction, like the one recently which went very well, as did this one but the problem was the level of interest yield on the bonds. Madrid sold €2.2 billion in medium-term bonds attracting strong demand, but the yields on 5-year paper rose to a 15-year high of 6.07 percent. The worry is these yields are unsustainable for a prolonged period and rumours are rife that Spain and Italy will soon be requiring a sovereign dept bailout, just like Greece, to shore up their waning banking systems.

The pound had a tough day despite some positive data releases, with a surprising, better than expected rebound in retail sales. Factory orders were also more positive than analysts had predicted. The problem is the fear over further asset purchase, with the minutes from the Bank of England on Wednesday hinting more QE was imminent.

Sterling/Euro exchange rates rallied up half a cent once the US markets had opened but gains were limited. Against the US dollar investors favoured the safety of the green back leaving the pound down a cent over the day’s trade. If you are looking to send money to the USA for a house purchase, the drop would have cost you around a £1000 on a $200,000 transfer.

It looks like the pressure will remain on sterling over the next couple of weeks as we await the July announcement from the BoE on interest rates and QE, the “will they, wont they increase the asset purchase” question remaining on the lips of investors and traders alike. Until then the pressure is likely to curb any gains the pound can make and we could even see sterling weakness as the announcement looms as markets price in an increase. Keep in touch with your broker at Currency Index to avoid missing any opportune buying moments as the month comes to an end.

Elsewhere, while we all hope Italy manage to stay in the Eurozone financially speaking, the same cannot be said in footballing terms as England take on the Azzurri this Sunday. Currency Index wish the boys the best of luck in their quarter final match. Come on England!!