The pound took advantage of market conditions to reach, albeit briefly, a 2 month high against the euro.
A combination of worries about slowing world economic growth after the publication of Chinese manufacturing data affected sentiment sending world commodity and equity markets sharply lower.
The decision by ratings agency Fitch to further downgrade Greece by three notches to B+ and place it on rating watch ‘negative’; fellow ratings agency Standard & Poor’s decision to cut the outlook on Italy from ‘stable’ to ‘negative’; the local and municipal elections in Spain which showed the ruling Socialist Party lose seats that in some cases they have held since democracy was restored in Spain in 1978 in a backlash by Spanish voters against the austerity measures introduced by the current government in an effort to avoid having to go the way of Greece, Ireland and Portugal and seek a bailout all weighed heavily on sentiment.
The euro touched a 2 month low against the pound and US dollar and an all time record low against the Swiss Franc.
The unpopularity of rescuing euro zone debtors was reflected in another disastrous regional poll result for German Chancellor Angela Merkel’s centre-right coalition Sunday. Her Christian Democrats slumped to just 20% in Bremen, Germany’s smallest federal state, while the liberal Free Democrats, junior partners in government, scored just 2.6% and lost their seats in the local assembly.
The US dollar continues to benefit from the risk aversion theme currently dominating the equity and commodity markets as the renewed flight to safety boosted the dollar’s progress on Monday after a disappointing report on Chinese manufacturing and fresh malaise about European debt. Signs that the Chinese economy is starting to lose momentum also fuelled interest in the dollar after a preliminary report showed Chinese manufacturing fell to a 10-month low in May.
Barclays, the UK’s third-largest bank, forecasts the global economy will expand by 4.1% this year, down from 4.9% in 2010. Morgan Stanley, one of 20 primary dealers of US government securities that trade with the Fed, said in a May 18 report global growth will slow to 4.2%.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
