The Dollar had a strong day on Monday, closing up against most counterparts. It ended the session at 1.2360 against the Euro and 1.4425 against the Pound. April home sales rose by 577k in April - a figure higher than the 565k estimates but explained by the rush of buyers who bought before the expiration of the home tax credit. The Dollar also appeared to have benefited from a spike in risk aversion caused by reports that the Spanish government had bailed out one of its regional banks and a statement by Chinese officials expressing concern of the European sovereign debt crisis. Falling equity markets also led investors to flee to Dollar safety.

   The Euro gave back ground made recently. It sank to lows of 1.2345 against the Dollar and closed out at 111.68 against the Yen. There were fresh concerns about the debt crisis as investors once again questioned the validity of the stabilization fund and the ability of governments to generate the political will to implement austerity measures. News that the Spanish government had to bail out Cajasur, a large regional lender, caught by the collapse of the property bubble led to a sharp sell off. There are now serious fears that Spain could end up like Greece and given its much larger size this could have a serious knock-on effect throughout the world.

   The Pound closed down against the Dollar at 1.4423 but closed up against the Yen at 130.21. The Pound is being viewed as risky by the markets and its fate is heavily bound up with the Euro. As markets became more risk averse so the pound suffered against the Dollar along with the Euro. All eyes will be on a welter of economic news out today, the most important of which will be UK GDP figures. There is still a certain amount of confidence in the UK’s ability to make cuts where necessary and the fact that much of its debt is quite new and so does not need to be paid back for a while. The UK economy has also seen recent signs of growth albeit patchy and inconsistent. The positives, however, have to be offset by scepticism that even the 6bn cuts mentioned by the government will be insufficient to make a difference.

   The Yen closed down against the Dollar at 90.61 but gained against the Euro closing at 111.68. Economic data showed a slight worsening on expectations: the all industry economic index which is a broad based measure of economic growth, fell by 0.8% a slightly higher drop than the 0.7% fall expected but an improvement on last month which saw loses of 2.3%. Chinese officials talking of the possibility of de-regulating the Yuan helped bolster the Yen as many traders would see this as positive for Japan and Japanese exports.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst