Forex Europe Review – Euro vulnerable to euro zone debt concerns

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The euro remained vulnerable to the threat of a Greek default and debt contagion in the euro zone. A disappointing Italian bond auction weighed the euro further as debt in the euro zone’s third largest economy could spiral out of control. A report said Italy had asked China to buy a significant amount of debt but the report was soon doubted and euro fell to 1.3557 against the dollar. EURUSD was briefly lifted to a week high of 1.3709 on rumours of a Merkel-Sarkozy initiative on Greece, which was later denied and euro tumbled back down again to 1.3622.


Sterling was subject to euro zone debt woes and was brought down to as low as 1.5758 against the dollar. Meanwhile, CPI data showed inflation picked up in the UK in August. Though it was in line with expectations, the increase is probably not sufficient enough to push the Bank of England to raise rates and are bound to leave them at record lows until next year. Speculation is that the BoE will introduce more quantitative easing to boost the weak UK economy, which consequently will weaken the pound further. Separate data released today also showed an unexpected widening in the UK trade deficit to its widest since last December. Gains in GBPUSD during the session were short lived due to the weak data.


The Swiss franc continues to traded in a tight range against the euro and the dollar today. The Swiss franc has remained steady against the euro since the Swiss National Bank intervention on September 6 when it introduced a ceiling of CHF1.20 against the euro.


EURJPY fell close to its weakest level in a decade as a Greek default is looming and a disappointing Italian bond sale weighed on the euro. Italy’s borrowing cost are now higher proving it is more difficult for the country to raise funds in the financial markets. Investors were pushed to take refuge in the safe haven Japanese yen, since its alternative safe haven, the Swiss franc is now out of bounds after the SNB intervention. EURJPY touched a session low of 104.39. USDJPY fell to 76.80. Confidence among U.S. small businesses dropped to a 13-month low in August as fewer companies projected better economic conditions and improving sales as shown by the National Federation of Independent Business optimism index today.