Sterling rose to a 2-1/2 month high against a struggling euro on Tuesday, with the single currency weighed down by Greece's debt problems and interest rate differentials moving in favour of the British pound. Yields on safe-haven German Bunds, the euro zone benchmark, dropped as jitters from the peripheral bond markets made investors nervous and pushed them towards safety. The yield gap between the 10-year UK Gilt and the German Bund widened to 135 basis points from around 123 bps on May 15, driving sterling higher, traders said.
The euro fell to 70.645, its lowest since March 12 and down 3 percent against the British pound so far this month. It was last trading at 70.87 pence, down 0.1 percent on the day, having been hit in recent days by a senior European Central Bank official who flagged the possibility of aggressive bond buying and deepening worries over Greece's ability to make repayments to creditors. "Things look grim for the euro right now," said Marshall Gittler, head of global FX strategy at IronFX Global. "It is questionable whether Greece can make the payment due to the IMF on June 5, followed by another large payment on June 12. It will be touch and go."
Greece must repay four loans totalling $1.76 billion to the IMF next month, including 300 million euros on June 5. Officials said on Tuesday Greece could avoid paying back the IMF on June 5 and win more time to negotiate a funding deal without defaulting if it lumps together all repayments due in June and pays them at month end. Sterling, though, underperformed a buoyant dollar which extended gains after a stronger than expected rise in US business investment spending plans. That comes after core consumer prices in April revived bets that inflation may reach the Federal Reserve's 2 percent target.
Sterling fell 0.6 percent against the dollar to $1.5373, well short of the five-month high of $1.5815 struck on May 14 and its lowest in nearly three weeks. Last week sterling hit a seven-year high against a trade-weighted basket of currencies, boosted by strong data.
The pound barely reacted to data which showed British retail sales growth surging in May. Confederation of British Industry's retail sales balance rose to +51 in May, far surpassing economists' expectations for +17, and up from +12 in April. British government bond prices rose moderately, though later pared gains along with US Treasuries after upbeat business investment data from the United States. The 10-year gilt yield was last down around 3 basis points on the day at 1.90 percent.
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