Forex Market Review – Euro and Sterling weaken after interest rate announcements

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The euro strengthened after a successful Spanish bond auction today when the Spanish government sold almost twice its maximum target of debt and pushed down yields. This helped lift optimism that the sovereign-debt crisis is easing. EURUSD hit a European session high of 1.2776 from the session open of 1.2714. The euro gained the most in a week against the yen to rise to 98.20 from the 97.77 session open.

The euro soon pared gains after the European Central Bank policy makers meeting today when they announced they left the benchmark interest rate unchanged at 1 percent. EURUSD fell back down close to the open level to 1.2713 by the end of European trading.

The focus now turns to the ECB press conference. Investors will pay attention to the language used to see any hints in certain key words that could signal future policy easing, comments on Greece, Italy and the central bank’s bond buys.

The British pound tracked gains in the euro following the Spanish bond auction to hit a high of  1.5366 from a low of 1.5277. However, sterling fell against most of its major counterparts after the Bank of England’s Monetary Policy Committee kept its key interest rate at a record low 0.5 percent, in line with the forecasts. The MPC also left its asset-purchase program unchanged at 275 billion pounds ($421.5 billion). GBPUSD tumbled to 1.5309.

Market sentiment was further dampened after economic data showed US jobless claims rose sharply by 24,000 to a seasonally adjusted 399,000 in the week ended January 7. Also US retail sales data came in weaker than forecast.

This helped lift the dollar against risk currencies, as it is perceived as a safe haven. Dollar gained sharply against the Australian and Canadian dollars. USDCAD rose to 1.0188 from  a session low of 1.0139. AUDUSD pared gains to fall to 1.0322 from 1.0376. It had risen from 1.0287 earlier in the day.