Euro crashes lower

The Euro-Dollar pair continues its rollercoaster ride this morning. After dropping two cents yesterday in quick time, sovereign debt worries in Spain and Italy along with fears over both countries banks brought the Euro down from the highs of last weeks interest rate rise by the ECB. Fears over sovereign debt and bank solvency concerns are spreading inwards from the periphery into the ‘core’ Euro-zone economies like a swarm of locusts, once the feeding frenzy in one country subsides, the market moves on in search on the next weakest link. The US Dollar is a good barometer for fear, and a four cent move in two days should indicate just how uncertain the Euro-zone situation remains. That said, the size of the move is probably now overdone, so we can expect a modest retrace back over the 1.39 level as the market awaits an update on the resolution to further bail-out deals.

The net result of the volatility in the Euro-Dollar pair has been to pull Sterling in both directions. Down against the Dollar and up against the Euro. Both moves reflect only the large movement in the EURUSD and not anything Sterling specific. UK CPI for this month has just been released, the market had been expecting further increases and the yearly figure to push toward 5%, but the monthly figure showed a welcome decline of 0.1% and the first decline in June since 2003. The Bank Of England are probably slightly relieved since they have persistently been calling the above target inflation temporary, but before we get excited the size of the decline is so small that it could be revised upwards, and so to positive territory very easily.

Later today the Federal Reserve minutes from Junes meeting are due. Given the uncertain tone from the statement there is not massive anticipation, more focus is on an upcoming speech by Chairman Bernanke. Remembering back to last year Mr. Bernanke used his Jackson Hole speech to announce the second round of QE, and the markets (especially the equity markets) are hoping he will use the upcoming speech to either announce of open up the possibility of further QE.

Report by Alistair Cotton