In US trade, the euro held up relatively well after Ben Bernanke failed to signal more imminent QE from the Fed and despite Fitch issuing a 3-notch downgrade to Spain’s credit rating.
It was both a busy and volatile session, with a mixture of positive and negative news seeing the euro emerge relatively flat from where it finished the Asian session. A surprise 25 bp cut in the benchmark lending rate by the PBOC was certainly ‘risk’ positive. As was Spain’s successful bond auction, which saw the country raise €2bn on good demand and at lower-than-expected yields. These two positive developments were offset by some disappointment that Ben Bernanke didn’t offer any hint that quantitative easing would feature at the next FOMC meeting on June 19-20. While he did warn that ‘the situation in Europe poses significant risks to the US financial system and economy’ and that the fiscal cliff would ‘pose a significant threat to the recovery’, his underlying message was that the Fed would maintain its ‘wait and see approach’.
Also weighing on the euro was Fitch downgrading Spain by three notches to BBB (negative outlook) concluding that Spain's reduced financing flexibility has ‘increased the likelihood of external financial support’. The downgrade was not totally unexpected hence its impact was minimal. Having ended yesterday’s Australian session around the 1.2570 level, the euro pushed up to a high of 1.2625 before ending the US session at 1.2561. Upon reopening for the Asian session the euro has drifted modestly to be currently trading in the mid 1.2530s. A string of Chinese data to be released over the weekend will be a key driver of sentiment towards the euro at the start of next week.