Anti-austerity sentiment gains strength in Europe

Anti-austerity sentiment is gaining momentum in Europe, says Peter O’Flanagan, head of FX trading, Clear Currency.

The Euro has shown some resilience in the face of a stronger shift in sentiment. Euro bond yields are coming under increasing pressure, political tensions based around anti-austerity movements are also causing turmoil, as French President Sarkozy lost the first round of the French elections to the anti-austerity challenger François Hollande.

O’Flanagan said: “Furthermore, the Dutch PM and his cabinet resigned yesterday having failed to reach an agreement on further deficit reduction measures. Yesterday’s data from the Eurozone indicated accelerating contraction with French, German Italian and Eurozone composite figures all missing their mark.  

“Add in continued signs of a slowdown in China, weakness in emerging markets and the increasing likelihood of an interest rate cut in Australia and we’d expect to see risk aversion as a stronger play, with the USD and JPY being the primary benefactors. This has not been the case.”

The EUR tested as low as 1.3105 against the USD before rebounding sharply. It has continued to trade higher and is now looking to test back towards last week’s highs at 1.3225. Yesterday’s rally in EUR/USD and coinciding fall-off in European yields suggest that there may have been some central bank buying helping to support the EUR yesterday but today the EUR will face the markets appetite for risk.

He said: “This morning there is a Dutch and Italian bond auction as well as the German Economic Ministry update on their macro economic forecasts. Demand and yield will be closely watched once again in the bond auctions. German officials cut their GDP growth outlook to 0.7% in January, from 1% the previous October. Should yesterday’s weak service and manufacturing PMIs be an indicator of a further reduction, we may see increased pressure on Germany and Europe.”

The pound continues to go from strength to strength and is looking to test last November’s highs at 1.6165 against the USD. This should prove to be a strong resistance and any advance higher should be well capped by 1.6250. EURGBP was once again breaking to new lows below 0.8150 (1.2270) yesterday as the EUR came under selling pressure. It has since come back from the lows but as long as the GBP outlook remains strong and the threat of asset purchases remains subdued we expect to see 0.8065 tested before a larger shift toward 0.8000 GBP public sector finances and net borrowings are due out this morning.

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