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14 July 2010

The euro held near a two-month high against the dollar on Wednesday induced by strong U.S. corporate earnings and easing concerns about euro zone sovereign debt, which also helped push equities higher. This in turn has increased Risk appetite in the financial markets and will impact movement with the risk sensitive currencies such as the Euro, GBP, AUD and NZD.

Intel Corp (INTC) reported results above expectations and gave an upbeat sales outlook, pushing S&P futures higher. Tom Trevorrow Currency Analyst at Torfx Currency brokerage noted that Euro price movement and growth related currencies may continue to rise as Speculative Traders were increasingly moving away from low yielding US Tresuries, this however may change as the all important Bank Stress tests from the Euro-Zone approach on the 23rd July.

Those interested in the prospects for the Euro will be watching the results of the bank stress tests, it has been rumoured that up to 15% of the Eurozone banks will fail the tests and others would prefer the results to be veiled in secrecy to avoid the ramifications of a sell off with the Euro. “Several countries are strongly reluctant to publish certain ratios from the stress tests,” one EU source said. “Others, on the contrary, want full transparency.”

The euro has continued to trade above the $1.27 level overnight against the USD, holding just shy of its two month high to the dollar of $1.2734 seen in yesterday’s trading. Against the Pound the price levels remain quite stable at 1.2010 EUR/GBP, with support at 1.2025 however Unemployment released this morning is proving to be supportive for the Pound so further gains may be likely this morning.

Sterling has benefited from the positive risk sentiment but was also boosted against the dollar yesterday by the release of data showing that UK inflation remains well above the governments 2% target. The figures were supportive of the view of those who argue that interest rates will have to rise. What is clear however is Sterling sentiment remains quite negative, with the Pound retracing virtually all of its previous gains against the majors.

On Monday credit ratings agency S&P warned that Britain is still at risk of losing its AAA credit rating due to high levels of debt. Then there were comments from MPC member Adam Posen who said that the country is at risk of sliding back into recession. These factors will continue to weigh on Sterling price movement and it is advised buyers into the major currencies should remain cautious over the coming weeks.

Tom Trevorrow

Currency analyst
TorFX Currency Brokerage
+44 (0) 1736 335264

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