Banking Fears Unsettle Euro
Banking Fears Unsettle Euro
There has been a potentially important shift in market sentiment, at least in the short term, with the US currency gaining support from more favourable US economic data. In part, this reflects the fact that the US currency has gained support from higher yields and improving yield spreads. There will still be caution over the situation due to underlying fears over reserve diversification away from the US currency. The situation in the Baltic states will be watched closely and further pressure for currency devaluations will tend to undermine the Euro. The dollar can maintain a firm tone, but will find it difficult to make strong headway from current levels with near-term Euro support realistic in the 1.3800 region.
The headline US employment report was substantially stronger than expected with an employment decline of 345,000 for May after a downwardly-revised 504,000 fall for the previous month. The upward revision was the first of the year while the headline employment decline was the smallest since September 2008.
The other data within the report was less favourable as the unemployment rate rose sharply to 9.4% from 8.9% the previous month which was a fresh 26-year high. There was also a sharp decline in the workweek which indicates that there are still important pressures within the labour market which will also tend to curb consumer spending.
The dollar weakened in an initial reaction to the data with the Euro gaining support from the improvement in risk appetite. The Euro was unable to hold above the 1.4250 level and then weakened sharply later in the US session with lows below 1.40 which represented the sharpest Euro decline sine April. There was some evidence of a switch in sentiment with the dollar tending to gain support from firmer data, in contrast to the recent consistent pattern of the US currency losing support on favourable economic news. There will be some speculation that the dollar will benefit from higher bond yields.
The Euro was also unsettled to some extent by the continuing stresses in the Baltic states with further expectations of heavy currency devaluations which would increase European banking fears Losses extended to below 1.39 later in the session on another Irish rating downgrade.
Investica
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Disclaimer: Investica’s market analysis is not investment advice and must not be taken as recommending particular market positions. Investica can take no responsibility for any actions taken by investors.
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