GBP=EUR currency pair edges lower in the wake of a strong week of gains, Euro dollar rate also under pressure

Last Updated on Tuesday, 29 May 2012 15:14 Written by Rob Samson Tuesday, 10 April 2012 12:15

GBP - EUR is now 0.28% in the red, the currency pair is at 1.2095 at 13:12 BST.

Last week saw the pound euro break above the 1.21 level as UK PMI data backed the sterling; by contrast the euro was weighed down by correspondingly weaker releases.

The euro is also having trouble against the US dollar.

"For EUR/USD, the rise to 1.31 from 1.3060 after the payrolls is disappointing from a euro point of view, as the payrolls had only a very modest positive impact," note KBC Markets in a morning note to clients.



In the wake of the payrolls we saw US yields drop sharply, and while euro yields may drop today, it is unlikely they will match the magnitude of the drop in US yields say KBC.

The main culprit for the euro disappointment might have been fears for more tensions in European markets.

Other news over the weekend concerned ECB financing of Portuguese and Italian banks.

It reached new records in March at €56.3B and €270B, up from respectively €47.6B and €195B in February. The overriding factor was of course the second 3-year LTRO which settled in March.

It was already known for some weeks that especially Italy and Spain asked for liquidity and also bought sovereign debt with the money, increasing the negative feedback loop in case of renewed tensions on sovereign bond markets.

Spain confirmed that it still targets a 2013 deficit of 3% of GDP. The Spanish government provided more details on the recently announced budget.

They will cut €10B of spending on health and education and will accelerate the sale of banking stakes.

Maybe, this announcement will compensate for the negative effects of the US payrolls report on non-core bonds. Last week, EUR/USD threatened to drop below an important support area at 1.3004/1.2976, but the payrolls prevented a thorough test of the area, even if, as said, the “gains of the euro on the payrolls were disappointing.

For new dollar longs KBC Markets say they would like to see the pair closer to obvious resistance (1.3386/1.3487).

After the US payrolls the pair might indeed try to reposition higher in the range. Much will depend from the performance of noncore EMU bonds that were under pressure last week.