Thursday 12^th April 2012

GBP/EUR – GBP/USD

Sterling rose to its highest in 14 months against a trade-weighted basket of currencies on Wednesday, bolstered by improving UK data, while the pound held near a three-month high against the euro. Worries about the euro zone debt crisis took centre-stage as Spanish 10-year bond yields remained high, prompting investors to switch to the UK currency which is still considered relatively safe in comparison to the common currency. The pound was supported by data that showed British retail sales rose in March at their fastest pace so far this year. The British Retail Consortium said like-for-like retail sales rose by an annual 1.3 percent in value terms, easily beating expectations of a stagnant performance. Analysts are said sterling was also benefiting from safe haven-related flows from the Middle East and this was likely to help it against the euro.

Stocks were higher on Wednesday, but riskier assets have suffered in recent sessions as Spain's funding problems returned to the fore, adding to jitters about the health of the global economy after Friday's disappointing U.S. jobs report. Spain is on the verge of a nervous breakdown. The first years of the EMU crisis were characterized by the strong cross-border holdings of European Government Bonds (EGBs) by national banks. The fear of a contagion and a systemic crisis triggered by a potential sovereign default explained the denial of the solvency crisis in Greece and the painful acceptance and implementation of the PSI. Spain is not suffering from a "contagion-style" crisis. The recent hike in the Bond did not leave other non-core countries unscathed, but the Spanish under performance highlights the new nature of the crisis: