The euro was under moderate pressure as markets tried to assess the impact from the S&P downgrade of Spain. The rise in Spain’s unemployment rate was also of no help. The EUR/USD cross rate was changing hands in the 1.3160 area around the open of the European markets.
However, the reaction, on the currency market and on the European equity markets was very orderly. European equities opened in negative territory, but the losses were soon reversed and a similar reaction was seen in the EUR/USD cross rate.
EU/Spanish markets reacting this way to high profile negative news suggests that these markets were oversold and that quite some negative news was discounted. Later in the session, market sentiment improved further. An Italian bond auction was ok. This was not the most important issue, but it helped to limit any potential (negative) impact from the S&P downgrade of Spain.
In the afternoon, the focus turned to the US Q1 GDP growth. The report brought a slight disappointment, even as consumer spending held up well.
The figure kept the debate open on more Fed policy stimulation in case the economic momentum would slow further down the road. This was seen a negative for the dollar while equities remained will bid. This context supported the euro against the dollar and EUR/USD reached a minor correction high after the publication of the US Q1 GDP report.
The final Michigan consumer confidence was also revised slightly higher but had no big impact on EUR/USD trading.
The pair closed the session at 1.3255, compared with 1.3219 on Thursday. The performance was partly due to overall dollar weakness, but once again, one cannot but retain the conclusion that the euro is holding fairly strong given the ongoing flood of negative news headlines on the EMU debt crisis.
However, the EUR/GBP trading developed in a tight sideways trading range. Sterling reached a new higher against the euro. There was a temporary setback intraday, but sterling closed the week near the recent highs.
EUR/GBP dipped after the open of the European markets as investors reacted to the rating downgrade of Spain by S&P. EUR/GBP reached a now correction low at 0.8134, below the 0.8143 support.
The reaction to the rating downgrade was rather short-lived and the euro found a better bid overall. EUR/GBP settled in the mid 0.8150 area. On the other hand, Cable continues to set new highs from 2012 after the US GDP release, illustrating the underlying strong performance of the UK currency.
EUR/GBP closed the session at 0.8149, compared to 0.8169. Markets clearly continue to anticipate a scenario of the BoE not raising the program of asset purchases at the May meeting (next week). Today, there are no important eco data in the UK.
Two weeks ago, the Minutes of the April BoE Meeting pushed EUR/GBP out of the previous range. Several other key support levels are lining up like 0.8143, the August 2010 low and 0.8068 the June 2010 low. EUR/GBP is now extensively testing the 0.8143 support. It could take time for EUR/GBP to break clearly below these high profile levels. Nevertheless, we are encouraged by the recent good performance of sterling and thus keep our EUR/GBP short position.
This morning, EUR is holding near Friday’s closing levels in Asia. Trading is developing in thin market conditions as several markets are closed.