Forexpros – The euro slumped to an almost one-month low against the pound on Tuesday, after Spain’s short-term borrowing costs rose sharply at auction of government debt, while remarks by senior Bank of England policymakers boosted sterling.
EUR/GBP hit 0.7992 during European morning trade, the pair’s lowest since May 31; the pair subsequently consolidated at 0.7998, shedding 0.36%.
The pair was likely to find near-term support 0.7970, the low of May 30 and resistance at 0.8038, the session high.
Spain’s Treasury auctioned slightly more that the targeted amount of EUR 3 billion, selling EUR1.6 billion worth of three-month government bonds at an average yield of 2.36%, up sharply from 0.84% at a similar auction last month.
Spain also sold EUR1.48 billion of six-month debt at an average yield of 3.23%, up from 1.73% in May.
Following the auction, the yield on Spanish 10-year bonds rose to 6.71%, nearing the critical 7% threshold, which is widely viewed as unsustainable in the long term.
On Monday, rating’s agency Moody’s downgraded 28 Spanish banks, citing concerns over Madrid’s ability to support its banking sector, which the agency said was vulnerable to further losses from Spain’s real-estate bust.
The announcement came after Spain’s government formally requested aid of up to EUR100 billion for its banks from its euro zone partners.
Meanwhile, Italy’s Treasury sold EUR2.99 billion worth of two-year bonds at an average yield of 4.71%, the highest since December.
Investor sentiment also remained fragile amid doubts over whether an upcoming European Union summit will result in fresh measures to tackle the region’s debt crisis.
The pound remained supported after BoE Governor Mervyn King said an interest rate cut would be less effective in stimulating the economy than more quantitative easing.
In testimony to Parliament’s Treasury Committee, King said the outlook for the U.K. economy had deteriorated in recent weeks as a result of the ongoing debt crisis in the euro zone.
The comments came after official data showed that public sector net borrowing in the U.K. rose to GBP17.9 billion in May, up from GBP15.2 billion in the same month last year.
The euro inched higher against the U.S. dollar, with EUR/USD edging up 0.05% to hit 1.2508, but remained weaker against the yen, with EUR/JPY down 0.36% to trade at 99.25.
Elsewhere Tuesday, data showed that the forward looking Gfk index of German consumer climate eased up to 5.8 for July, confounding expectations for a decline to 5.6. The index posted a reading of 5.7 in June.
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