Euro Exchange Rate First Time Fall Since 14 Month High vs Pound & Dollar

The euro fell sharply yesterday for the first time this year after closing last week at a 14 month high against both the pound and the dollar.

Fresh concerns about the political outlook in both Spain and Italy, respectively the third and fourth largest economies in the euro zone ‘pushed’ traders into taking profits and the euro ended up losing over 1% on the day against both the pound and the dollar.

In Spain, pressure is mounting on Spanish Prime Minister Mariano Rajoy to resign amid a growing corruption scandal. Although Rajoy strenuously denies the allegations that he and other senior party members accepted secret payments, the news sent Spanish government bond yields higher.

Meanwhile, in Italy former Prime Minister Silvio Berlusconi's party won strong gains in polls ahead of national elections that are scheduled for later this month on promises that he would refund an unpopular property tax that was levied last year, sparking concerns that emergency action taken by the outgoing technocrat government of Mario Monti to balance the books would be reversed.

In France, President François Hollande said that there is still time to reach an agreement on the European budget before the next European Union (EU) summit, due to begin next Thursday. The European Council is scheduled to meet on 7 and 8 February to discuss the 2014-2020 budget as well as EU trade and foreign affairs.

“We will do everything to reach an agreement at the next summit, but the conditions are not in place yet,” Hollande said yesterday. Hollande met with Italian Prime Minister Mario Monti yesterday in the usual round of bilateral pre-summit meetings.

Monti echoed Hollande’s comments, once again expressed his view that Italy’s contribution was disproportionate to its real wealth.

Spanish Prime Minister Mariano Rajoy will meet with Merkel today to discuss items on the EU budget agenda, while Hollande is scheduled to address the European Parliament tomorrow.

Overnight, the Reserve Bank of Australia (RBA) kept interest rates unchanged at the record low of 3%, as expected. Australian central bank Governor Glenn Stevens commented that the downside risks to the global economy have abated of late but he still left the door open for more easing should conditions deteriorate further.

The RBA also mentioned the signs of improvement in both China and the US at the beginning of 2013.

In China, the official non-manufacturing purchasing managers index (PMI) rose marginally from 56.1 in December to 56.2 in January according to the latest data release from the National Bureau of Statistics and China Federation of Logistics & Purchasing published over the weekend. A reading above 50 indicates expansion.

In a separate report, the Chinese Index Academy, a private research institute announced that house prices rose by 1% month-on—month in January in the 100 cities that they track, well above the 0.2% increase seen in November when they last reported.

Analysts at Japanese bank Nomura commented that “we maintain our view that the government cannot maintain loose monetary policy in 2013.”