Forex Market Review – Euro retreats as Spanish bond yields hit record highs

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Euro fell back down against the dollar in European trading, moving off a one-month high hit early in the Asian session when it was lifted by a positive reaction to the Greek election results. On Sunday’s vote, the New Democracy party won enough votes to control the Greek parliament with a coalition with Pasok party. Markets were happy with the result because both parties are pro-bailout and are expected to stick to the terms of the EU/IMF bailout. In contrast, the Syriza party was considered to be against the bailout and there were fears that if they won, then Greece might end up having to exit the euro zone.

 

EURUSD however retreated from a one-month high of 1.2746 hit in the prior Asian session and fell in the European return to a low of 1.2613 before the New York session overlap, and continued declining. The Greek election may have removed immediate near term risk but focus now shifts to Spain, given the upcoming release of the private sector stress tests. Spanish 10-year bond yields surged to record highs today, above the key 7 percent level, which is considered to be unsustainable in the long run.

Cable fell 0.4 percent, tracking the EURUSD pair lower as risk appetite wore off. Sterling will likely take direction from this week’s UK events, which include CPI figures  on Tuesday, where inflation is expected to remain at 3.0 percent. Also, there is the release of the Bank of England’s MPC minutes on Wednesday, where a dovish tone is likely to be seen. GBPUSD fell in European trading from an earlier Asian session high of 1.5738,  to 1.5636 going into the U.S. session.

Yen gained back losses against the euro as safe haven demand rose, pushing EURJPY back down to 99.67 from 100.79 and continued to decline going into the North American session. USDJPY hovered between 79.03 and 79.29during European trading before heading lower into the US session overlap. Movement in the yen is likely to remain driven by broader market sentiment, in the absence of domestic data, and will strengthen if risk aversion rises.

 

AUDUSD managed to trade above Friday’s close for most of the European session until the start of US trading. The pair was due for some profit taking following the rally earlier today after news from Greece elections lifted the aussie to a one-month high of $1.0133. Focus will shift to RBA monetary policy meeting minutes tomorrow.