Forex Europe Review – Euro weakens as Italy prepares for austerity vote

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The Euro was on the down side against the US Dollar in European trading today. Despite a brief boost intra-day following the release of Euro zone CPI indicating that inflation is still prevalent, concerns over debt contagion still weighed more. EURUSD was brought up to a session high of 1.4257 from the open of 1.4193 after the CPI data but soon began to slide to a low of 1.4145. The Single Currency was dragged down as Italy auctioned 5-year bonds at the highest yield in three years and the government was forced to call a confidence vote on austerity measures. Italy’s 1.8 trillion-euro debt is larger than that of Greece, Ireland, Spain and Portugal combined. European banks stress tests are due tomorrow which could also spark a pre-weekend sell-off.

Sterling extended losses from the previous session after reaching a three-week high due to a weaker US Dollar which was bruised late yesterday following Moody’s warning that the US top notch credit rating is in danger of being downgraded if the debt limit is not raised by August 2^nd. Also hints by US Fed Chairman Ben Bernanke of further quantitative easing weighed on the greenback. GBPUSD pulled back from the Asian session high of 1.6192 down to 1.6093 in the European session, as investors booked profits. However, Sterling highs are seen to be limited as general risk aversion will keep investors from holding on to it for the long-term, especially since a series of weak UK economic data will prevent any BoE rate hikes until next year. Meanwhile EURGBP has been hovering around its month low reached on Tuesday. The pair traded between 0.8830 and 0.8785.

The Swiss Franc eased of its record highs against the US Dollar reached at the end of the US session yesterday after Moody’s threatened to downgrade the U.S. triple-A rating if the debt limit is not raised by August. Investors turned to safe haven assets like the Swiss Franc during these times of crisis, leading USDCHF to a new all-time low of 0.8080. Meanwhile increased concerns over the debt situation in the EU peripheral economies also brought theFranc to record highs against the Euro. EURCHF retraced slightly of the all-time low of 1.1492 reached last night to rise to 1.1617 as traders took the opportunity to book profits.

The Yen weakened against the Dollar this morning as speculation increased over fears that the Bank of Japan will intervene to halt the currency appreciating further in a bid to support Japanese exporters. A strong yen will be detrimental to trade since exports will become more expensive. Speculation was fuelled after a senior Japanese finance ministry official mentioned that the central bank could intervene without warning to weaken the Yen. Shortly before the official’s comments just before the open of the European session, the Yen spiked down sharply caused by what traders cited as bids by a large U.S. bank, lifting USDJPY to 79.59 from 78.27 within 3 minutes. During the European session, USDJPY traded between 79.16 and 78.87.

Note: Daylight Saving Time in effect for GMT