Daily Currency report

From Peter-John Theuninck, Currency Analyst at Baydonhillfx

The Euro remained under pressure on Friday after ratings agency Moody’s downgraded Italy and warned it could cut the rating further if the country’s access to debt markets were to dry up. Italy’s rating stands at Baa2 which is only 2 notches above junk but despite the cut in rating an auction of 3-yr bonds proved quite successful as the yield rate at the auction dropped, lowering borrowing costs. The effect on the single currency was quote clear as the market ceased to push the EU currency lower and range trade for the majority of the day before a rally in Equity and commodity markets saw the Euro recover earlier losses.

The rally in equity and commodity markets came on the back of better than expected economic data from China, GDP figures released showed the Chinese economy grew 7.6% in the second quarter. The growth rate is still at its weakest pace in three years but was still better than the markets consensus forecasts which boost risk appetite and saw both the Euro and the Pound appreciate on the back of the improved market sentiment. US data did impede gains against the Dollar as the country’s economic outlook remains quite positive and has increased expectations that eh Fed may not take any policy action at its July meeting. US PPI data showed inflation remaining unchanged at 0.7% y/y in June while the University of Michigan’s current conditions index beat analysts’ expectations.

US Federal Reserve Bank Chairman Ben Bernanke delivers his semi-annual testimony before congress this week and investors will be keen to see if the Fed Chairman will give any hint of additional monetary stimulus being considered by the US central bank. US retail sales data is scheduled to be released this afternoon where activity is expected to show a slight improvement. Positive data could likely see the Dollar rally as it diminishes the expectations of quantitative easing; retails sales are expected to improve 0.2% m/m against a previous -0.2% release.

EU inflation figures are expected to be released this morning and while the market is in an optimistic mood the data is likely to be overlooked fairly quickly and the single currency could see very little reaction to the numbers. Sterling will follow movement in the wider market with no economic data being released today although CPI data and the Bank of England’s monetary policy meeting minutes are being released on Wednesday so we expect plenty of activity from the Pound later in the week.