Pressure Remains on Euro and Sterling

Jun.16.11 | About: CurrencyShares Euro (FXE)

Continued fallout from the Greek debt crisis has the euro trading at its lowest level versus the dollar since early May. Sterling is also being pressured due to its high correlation with the euro and weak fundamental data.

Greek credit default swipes spiked, trading at a spread of 1,900 bps above the equivalent German bund. Pressuring both Greek sovereign bonds and the euro were comments from European Central Bank Governing Council member Nout Wellink who suggested the European Financial Stability Facility, also known as the temporary euro zone bailout fund, should be doubled to EUR 1.5T. Wellink is also the Dutch Central Bank President. EU inflation data which was released in-line with consensus expectations was largely ignored as traders continue to focus on the Greek debt crisis. More downside pressure may be felt via the EUR/USD as the pair is testing the 1.4100. The psychological support at 1.4000 is the next mile marker with 1.3970 the nearest support.

Cable is off sharply after a larger than expected contraction in monthly retail sales, -1.5% on expectations of -0.5%. Yesterday BoE Governor Mervyn King had some bearish comments for sterling. King was adamant in defending the inflation fighting reputation of the BoE but was firm in his commitment to refrain from raising interest rates as wages and the money supply continue to remain subdued.

Sterling looks fundamentally week as expectations for the Bank of England Monetary Policy Committee to remain on hold in the near term as well as a recent string of negative news flow have been seen for sterling. A number of academics have called for the British government to scale back its belt tightening program, disappointing Halifax HPI numbers, followed by rigid comments from Moody’s last week that were quickly retracted. The stream of discouraging reports is occurring as the GBP/USD has made a close below its trend line from the May 2010 low. A head and shoulders reversal pattern sends an ominous message to sterling bulls. Cable has support at the May low of 1.6060 followed by March low of 1.5950.

The flair up of the European debt crisis is also affecting sterling. Comments by Irish Finance Minister Michael Noonan called for bondholders to participate in any losses from Anglo Irish Bank Corp which was effectively nationalized by the Irish government. British banks hold approximately EUR 186B worth of exposure to Irish debt. Thus explains the high correlation between the EUR/USD and the GBP/USD. For the last three rolling months two currency pairs have a correlation of 0.79. Therefore, where the EUR/USD goes, so does the GBP/USD.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.