Euro Sell-Off Continues

Euro Sell-Off Continues

There is no change to sentiment this morning as the euro remains on the back foot as Eurozone bond yield spreads remain the driver for US Dollar buying. This is sufficient to keep Eurodollar testing 2 – 3 month lows on a daily basis. The sovereign spreads continued to widen yesterday despite the widely heralded financial rescue announced for Ireland and its banking sector. The package did little to dissuade fears of contagion of the Greek/Irish problems into other peripheral nations. Official reaction towards the future of the Euro and Eurozone has remained positive with ECB and EU spokespersons being joined by the Chinese government news agency, Xinhua in encouraging the future of both. The Chinese stated that ‘Contrary to the widespread claim that the Eurozone is doomed to break up, the single currency will not fail’. It did add however that the currency was facing its toughest challenge since instigation.

Other than the above interest, things in markets remain subdued with just minor de-risking taking place ahead of the year end. Now is the time of course that analysts are penciling in their outlook for currencies for next year. Against the current back drop and with adverse conditions in the UK, Eurozone and Japan expected to persist for a while yet, most predictions are for the Dollar to be stronger overall during 2011. This will only strengthen traders’ resolve to test lower levers in Eurodollar and Cable and push USD/Yen higher during the remaining few trading days in 2010.

Data today can again be viewed largely as second string. Following the as expected revision to growth projections for the UK from the OBR and despite weaker than expected loan growth and consumer sentiment, Sterling remained unfazed, slipping versus the stronger greenback, but making gains against the beleaguered Euro. No further data scheduled today from the UK. Eurozone data remains being reported on the reasonable to good side but is unable to provide any support for the currency. Today’s unemployment reports and provisional CPI estimate are unlikely to change this pattern. Ahead in the US today, we have S&P/Case Shiller housing data, the Chicago PMI, and the Conference Board consumer confidence index.

Report by Tim Lewis