The decision by ratings agency Fitch to strip Spain of its “Triple A” rating late on Friday wasn’t entirely unexpected, but coming as it did soon after the Spanish governments success in passing its austerity budget, it was a somewhat fitting ended to a turbulent week for Spain and its banking sector.
The fact is the likelihood of the budget being implemented is extremely slim being that it was only passed by 1 vote, with abstentions by the Catalan nationalists.
The catalyst for the downgrade was the austerity measures themselves, which Fitch believes will cause growth to shrink way short of government forecasts. With Spanish banks under pressure to come clean on the level of their bad debts and Spanish bond yields heading back towards their May highs it surely is only a matter of time before Moody’s follows suit.
Euro zone economic confidence also worsened in May as concerns over the sovereign debt problems continued to weigh on sentiment. Despite these problems the Euro has slipped back, but has remained above its recent lows against the dollar so far.
While this may have to do with the fact that both the US and UK markets were closed for their spring bank holiday’s it doesn’t change the fact that the Euro continues to remain vulnerable as mixed messages continue to emanate from both European governments as well as the European Central Bank.
New ECB member Patrick Honohan welcomed the new bond purchase program as an “important” new weapon in the bank’s arsenal, while Germany’s Axel Weber and Bank of Italy’s Mario Draghi have both called for an end to the program as soon as possible.
The pound has continued to hold up reasonably well despite the problems faced by the UK coalition government over the weekend and the resignation of the new Chief Secretary of the Treasury, over expenses claims. Against a basket of currencies the pound is trading near to its highest levels for a week. Manufacturing PMI data out today for May is expected to show a figure of 57.5.
Concerns over China’s economy are also weighing on sentiment, as data showed manufacturing growth had slowed by more than expected, while the Reserve Bank of Australia decided to keep interest rates on hold at 4.5%.
EURUSD – six consecutive monthly declines is the longest losing sequence the single currency has experienced since 1999, just after its inception, and the 1.2135 level remains the proverbial line in the sand preventing a move towards the 1.1700 level, and 2005 lows.
For now this key 50% Fibonacci level has kept the declines at bay for now, but with rallies getting shallower the risk still remains for an eventual break.
There is channel resistance just above 1.2360, while the Euro needs to see a break above the 1.2450/60 level for a move towards 1.2700 to unfold.
GBPUSD – despite the problems of the UK government over the weekend the pound has held up reasonably continuing to rise against a basket of currencies.
The key support level remains around the 1.4230/50 level and remains the key barrier to any further sterling declines in the short term. The 1.4000 level remains a key support on a monthly close, and despite last weeks break out above 1.4500/20 level not following through as quickly as the odds remain in favour of a move towards 1.4780 and even 1.4850. However a break below trend line support 1.4440/50 area could well undermine this scenario.
EURGBP – the Euro continues to be weighed down by sovereign debt concerns with rallies above 0.8500 continuing to be rebuffed. The support around the 2 year lows at 0.8400 continues to prevent further Euro declines. A break below these lows and we could be looking at a break lower towards 0.8250. A move and close back above 0.8520 retargets the 0.8610/20 area.
USDJPY – the yen has weakened further over the weekend after a split in the Japanese govt coalition. Japans Social Democratic Party has exited the tri-partite coalition after a difference of opinion with its partners over a US military base.
This weakness has seen the dollar break above the 200 day moving average as well the 91.20 resistance area.
A close above these levels around 91.20 has the potential to re-target the 92.80 level. Interim support can be found around the 90.70/80 initially and then 90.20.
The fact is the likelihood of the budget being implemented is extremely slim being that it was only passed by 1 vote, with abstentions by the Catalan nationalists.
The catalyst for the downgrade was the austerity measures themselves, which Fitch believes will cause growth to shrink way short of government forecasts. With Spanish banks under pressure to come clean on the level of their bad debts and Spanish bond yields heading back towards their May highs it surely is only a matter of time before Moody’s follows suit.
Euro zone economic confidence also worsened in May as concerns over the sovereign debt problems continued to weigh on sentiment. Despite these problems the Euro has slipped back, but has remained above its recent lows against the dollar so far.
While this may have to do with the fact that both the US and UK markets were closed for their spring bank holiday’s it doesn’t change the fact that the Euro continues to remain vulnerable as mixed messages continue to emanate from both European governments as well as the European Central Bank.
New ECB member Patrick Honohan welcomed the new bond purchase program as an “important” new weapon in the bank’s arsenal, while Germany’s Axel Weber and Bank of Italy’s Mario Draghi have both called for an end to the program as soon as possible.
The pound has continued to hold up reasonably well despite the problems faced by the UK coalition government over the weekend and the resignation of the new Chief Secretary of the Treasury, over expenses claims. Against a basket of currencies the pound is trading near to its highest levels for a week. Manufacturing PMI data out today for May is expected to show a figure of 57.5.
Concerns over China’s economy are also weighing on sentiment, as data showed manufacturing growth had slowed by more than expected, while the Reserve Bank of Australia decided to keep interest rates on hold at 4.5%.
EURUSD – six consecutive monthly declines is the longest losing sequence the single currency has experienced since 1999, just after its inception, and the 1.2135 level remains the proverbial line in the sand preventing a move towards the 1.1700 level, and 2005 lows.
For now this key 50% Fibonacci level has kept the declines at bay for now, but with rallies getting shallower the risk still remains for an eventual break.
There is channel resistance just above 1.2360, while the Euro needs to see a break above the 1.2450/60 level for a move towards 1.2700 to unfold.
GBPUSD – despite the problems of the UK government over the weekend the pound has held up reasonably continuing to rise against a basket of currencies.
The key support level remains around the 1.4230/50 level and remains the key barrier to any further sterling declines in the short term. The 1.4000 level remains a key support on a monthly close, and despite last weeks break out above 1.4500/20 level not following through as quickly as the odds remain in favour of a move towards 1.4780 and even 1.4850. However a break below trend line support 1.4440/50 area could well undermine this scenario.
EURGBP – the Euro continues to be weighed down by sovereign debt concerns with rallies above 0.8500 continuing to be rebuffed. The support around the 2 year lows at 0.8400 continues to prevent further Euro declines. A break below these lows and we could be looking at a break lower towards 0.8250. A move and close back above 0.8520 retargets the 0.8610/20 area.
USDJPY – the yen has weakened further over the weekend after a split in the Japanese govt coalition. Japans Social Democratic Party has exited the tri-partite coalition after a difference of opinion with its partners over a US military base.
This weakness has seen the dollar break above the 200 day moving average as well the 91.20 resistance area.
A close above these levels around 91.20 has the potential to re-target the 92.80 level. Interim support can be found around the 90.70/80 initially and then 90.20.
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