Euro Still Weighed by Sovereign Fears

Euro weighed by sovereign fears, sterling treads water ahead of another key week. Fridays sharp fall in the single currency could well see a period of introspection today as markets set to react over the likely direction of the next move.

With a number of Europes markets closed and little in the way of economic data to drive sentiment today, the focus will continue to be on bond yields and spread differentials as European officials remain split over the next course of action.

ECB remains opposed to any type of debt restructuring, yet steadfast in its pursuit of an interest rate policy which makes a restructuring ever more likely, after Thursdays indication that a July rate hike was on the cards.

While a Greek restructuring maybe manageable, a view espoused by Bundesbank president Jens Weidmann at the weekend, there are fears that rising Spanish and Italian borrowing costs are making life increasingly difficult. Matters are not being helped by political divisions in these countries as the appetite for fiscal austerity starts to wane in the face of the reality of it.

EURUSD key support levels remain around 1.4010 the 200 week SMA and 1.3970 the 100 day SMA. A break below 1.4250 61.8% retracement level of the move from the May lows at 1.3970 to the 1.4695 highs could well be the catalyst for a test of these key levels.

The pound managed to recoup some of Fridays losses after the shockingly poor April manufacturing and industrial production data for April. The data does need to be set in the context of the extended Easter break and Royal Wedding and this could well have been one of the reasons behind the late pullback, as markets factor in a May rebound.

The poor data resurrected the debate about further QE from the Bank of England, but this seems extremely unlikely given the current inflation level, as well as future upward pressure on prices.

The argument that inflation would begin to slip back was blown out of the water last week by the announcement by energy company Scottish Power that it would be hiking its gas prices by 19%, and electricity prices by 10% from August this year.

Tomorrows inflation data will continue to shine a light on the Bank of Englands continued refusal to hike interest rates, especially so given that price pressures seem likely to continue to grow given that other energy companies will likely follow Scottish Powers lead.

GBPUSD has key long term trend line support at 1.6175 from May 2010 lows at 1.4230.A break here would refocus attention on the major support between 1.5965 and 1.6000, the 3 month lows as well as the 200 day MA.

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