Pound Euro Exchange Rate (GBP EUR) Retraces Following Fears Over Spanish Debts

Modified: Monday, 4 February 2013 17:14 BST - Written by Frank Davies

STORY LINK Pound Euro Exchange Rate (GBP EUR) Retraces Following Fears Over Spanish Debts

Yesterday’s session in the currency markets brought a joint press conference between under-fire Spanish Prime Minister Mariano Rajoy and German Chancellor Angela Merkel. Rajoy has faced calls for his resignation in recent weeks over allegations that members of his ruling party had received illicit payments into a ‘slush fund’. Merkel used the set-piece public event to provide a public vote of confidence for the Spanish leader, commenting that they had built a relationship ‘built on trust’.

However, bond market participants were not convinced by the joint press conference; the interest which Spain pays on its benchmark 10 year gilts climbed by 23 basis points on the session to 5.42%. Whilst this is still a long way away from the ‘dangerzone’, considered to be above the 7.0% level, it still represents a historically high level and is certainly higher than the eurozone’s leaders would be happy with.

The Pound clawed back a large portion of the heavy losses which it incurred on Friday against the single currency during yesterday’s session. This sent the Pound Euro exchange rate (currency : GBP EUR) up from the 1.1400s in early trading to break into the 1.1600s once more by the end of the European equities session.

The losses for the euro look likely to have been triggered by a technical move due to GBP EUR being oversold on Friday. However, it is far too early to posit that the move lower at the end of last week marked the end of the recent strong downtrend for GBP EUR. The old market adage states that total capitulation occurs at the bottom of a ‘Bear Market’. Friday afternoon saw the pair lose over a percentage point in a very short space of time, but it looks likely that there will be more to come.
Meanwhile, rumours are circulating that the recent heavy support for the euro is not being driven solely by fundamental factors. The single currency has gained around 25% against the Japanese Yen since November of last year. Market whispers hint that the dramatic weakening of the Yen has been elicited by the Bank of Japan who have sold large quantities of Yen and bought euros in the currency markets. If this is the case, then the recent sustained support for the single currency may be here to stay for some time.

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