EUR extends its decline
The US Federal Reserve minutes from the June rate meeting signalled that a further economic slowdown would bring growing support for additional stimulus. The Fed recently extended its “Operation Twist” programme, essentially swapping short term bonds for long-term ones, through to the end of the year but now talk has turned to whether a third round of quantitative easing might be needed. However, things will have to get worse before any further action is taken.
Recession plagued Spain unveiled new austerity measures yesterday designed to slash €65bn from the public deficit by 2014 as Prime Minister Mariano Rajoy yielded to EU pressure to try to avoid a full state bailout. The conservative leader announced a 3-point hike in the main rate of Value Added Tax on goods and services to 21% and cuts to unemployment benefit and public sector pay.
Diminished hopes of immediate Fed action kept investors firming in ‘risk-off’ mood. Despite a softening in Spanish bond yields the euro remains under pressure with EUR/USD hitting a low of $1.2211. Meanwhile, GBP/EUR broke €1.27 for the first time over 3 years before easing back.
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