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Euro remains on the back foot

Euro remains on the back foot

Most of last week saw sentiment decidedly risk adverse with the news flow giving little reason to change. The eurozone debt crisis rumbled on resulting in EUR/USD languishing near a two year low and GBP/EUR reaching a 30 month high. Although the euro enjoyed a modest respite late on Friday, it remains vulnerable as markets tire of the lack of decisive policy action needed to address the financial crisis. German bond prices extended last week’s gains on Monday as investors worried the European Central Bank had changed its stance on how some bondholders could be treated under Spain’s bank bailout.

Despite Moody’s unexpectedly cutting Italy’s sovereign credit rating to Baa2, just two notches above junk status, the country passed a key market test hours later. Italy comfortably sold €3.5bn of new 3-year bonds at 4.65%, down from 5.3% at the last auction. However, 10-year bond yields bucked the trend and rose close to 6.0%.

According to the Office for National Statistics, output from the UK construction sector fell 6.3% in May compared to a year earlier. The period between March and May saw an even steeper decline of 7.4%. The main driver was the fall in public works which fell close to 22% as the government’s austerity measures start to bite.

A moderate recovery in risk appetite sees EUR/USD start the week back over $1.22 after slipping to a low of $1.2161 on Friday. Sterling also recorded further gains against the US dollar with GBP/USD trading around the $1.5550 level early this morning.

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