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Euro under continued pressure

Euro under continued pressure

Spanish 10-year yields fell back below 6% yesterday and have eased lower to 5.817% this morning. There have been a number of speeches from Spanish officials overnight and this morning commenting on the fact that Spain’s fiscal deficit reduction targets should change market perception. Spain did manage to raise €3.18 billion in 12 and 18-month bonds yesterday albeit at a higher yield than last time.

The German government is due to auction €5 billion of 2-year notes this morning. 2-year yields are currently at 0.144% so while the auction looks extremely attractive from the government’s point of view, it is unclear whether the market feels the same way. Last week, the auction technically failed when the government was unable to find enough bidders for its debt.

In the UK today not only sees the publication of the Minutes of the April MPC meeting, but also March labour market data. We expect to see that the Committee voted unanimously to keep Bank Rate on hold at 0.5%, and that there was continued dissention over the outlook for further asset purchases. We expect that both Miles and Posen (2 of the 9 members) voted for an additional £25 billion, but expectations for May would harden if they were joined by any other members.

The need for further asset purchases could be hinted at in the labour market report, released at the same time as the Minutes. While we look for a small rise in the number claiming unemployment benefit in March, it is the slowing in earnings growth that points to lower inflation further out. We expect headline average weekly earnings growth to slow to 1.2% in the three months to February, relative to the same period a year ago as adverse bonus effects continue to feed through. That would be the weakest growth rate since June 2010 and still well below inflation, highlighting the squeeze on real earnings.

All in all the level of threat to the Euro seems to be more significant than for GBP so we may well see GBP/EUR improving throughout the day.

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