Pound To Euro Exchange Rate Spirals To 10-Week High As Investors Shun Spanish Bonds

April 5, 2012 - Written by Frank Davies

STORY LINK Pound To Euro Exchange Rate Spirals To 10-Week High As Investors Shun Spanish Bonds

The Pound to Euro Exchange Rate is 1.2082.

A disappointing uptake for Spanish government bonds at yesterday’s auction shaped the currency markets during yesterday’s session. The debt-addled Iberian state managed to shift only €2.6bn worth of gilts – it had been targeting €2.5-€3.5bn. This was seen as a ‘vote of no confidence’ in the Spanish government’s austerity measures, as yesterday was the first auction of the country’s secured debt since last Friday’s announcement of €27bn worth of government cuts and de facto tax increases.

Institutional investors reacted to the development by voting with their feet and moving their funds out of Spanish bills, sending the yield on Spanish ten year bonds spiralling to 5.61%. The interest which Spain’s administration is having to pay on its debt is now approaching the 7% level generally considered by analysts to be an unsustainable level.

Fears over the future stability of Spain’s public finances, and the potential that the country’s government will have to approach the EU/ECB/IMF ‘Troika’ in an attempt to secure a ‘Greece-style’ bail-out, caused market participants to shun the euro during yesterday’s session. This, in combination with a significantly stronger than anticipated UK PMI Services survey, which pointed to healthy levels of job creation in this key sector of the British economy, took the GBP EUR exchange rate all the way up to 1.2104 , its highest level since 16th January.

However, the spike for GBP EUR could rapidly turn around later today, when the latest Bank of England monetary policy decision is announced. An extension to the £325bn already allocated to the Bank’s asset purchase scheme would see GBP EUR retrace back below the key psychological barrier of 1.2000.

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