InvestMacro FX

If you are looking for further evidence as to just how bleak the outlook is for Portugal, consider this – it costs more for Portugal to borrow for six months, than it does Germany for thirty years.

Consider also that the yield spread between Portugal’s debt and the benchmark German bunds continues to widen with each passing day and on Tuesday, the spread surpassed a whopping 636 basis points. This is the highest spread for Portuguese debt since the formation of the Eurozone region and the subsequent adoption of the shared euro currency.

As a result, Portugal’s two-year bond yield climbed to 11.74 percent, while the ten-year yield rose to 9.61 percent. This is a dramatic increase and as recently as of the end of March, the two-year yield was about two hundred basis points lower at 8.78 percent, while the ten-year yield was 8.41 percent.

Adding to the perplexity of the situation is Portugal’s latest revision to last year’s deficit. This latest amendment has once again revealed the actual deficit to be greater than originally reported and is now pegged at 9.1 percent of the country’s Gross Domestic Product compared to the 8.6 percent figure announced previously.

All this is taking place against the backdrop of a fresh round of meetings in Lisbon where representatives from the European Central Bank, European Union, and the International Monetary Fund are attempting to hammer out a bail-out plan that would permit Portugal to meet its growing debt obligations. Time is becoming more of an issue, however, as Portugal has two key repayment dates looming on the horizon. The first of these is scheduled for June 15^th when it is required to repay nearly five billion euros (US$7.3 billion), with a similar amount due in October.

Portuguese Prime Minister Jose Socrates – who resigned last month after failing to win approval to cut government spending – will be replaced in elections scheduled for June. As one of his last acts as Prime Minister, he has called for a bailout plan to be in place by mid-May. While he has not said so explicitly, the implication is that without this emergency funding, Portugal will be unable to meet the June bond repayment date.

Scott Boyd is a currency analysts and a regular contributor to the OANDA MarketPulse FX blog.

George Cavaligos, MF Global – The FOMC meeting on Wednesday reinforced the FEDs intention to continue QE policies. The US Dollar Index made new lows and Gold and Silver have made new highs, by cheapening the US Dollar they continue to feed the inflation fears of the world.

The UK economy grew by 0.5 percent for the first quarter of 2011 according to the latest figures to be released by the Office for National Statistics. While not spectacular by any stretch of the imagination, the return to positive growth after six months of negative growth may bring the end of talk of a “double dip” recession for the beleaguered economy.

The ONS did caution that the GDP calculation is still preliminary and there will be two revisions in the next month or so, but the feeling on the street is that the 0.5 percent reported yesterday is a “worst case” scenario.

One area that appears ripe for revision is the 4.7 percent decline in the construction sector. Weather aside, it is difficult to pinpoint a reason for such a dramatic decline. This is even more suspect considering the 1.1 percent growth in Manufacturing and a similar increase in the Services sector. Also, the published GDP figure is considerably less than the projected 0.8 percent put forward by the Treasury’s Office for Budget Responsibility tasked with providing an independent review of public finances and the overall economy.

Inflation and Austerity to Be Factors

If sustained growth has indeed returned to the British economy, the spotlight will now focus even more sharply on inflation and to a lesser degree, the impact of the scheduled government spending cuts.

Unless the GDP figure is revised sharply upwards, first quarter growth is considerably less than the Bank of England and indeed the government predicted and this could have two important implications. Firstly, weaker growth means lower tax revenues for the government and this could throw a spanner into the works making it more difficult for the government to meet its budget “austerity” targets.

Secondly, the weaker-than-expected growth could force the Bank of England to delay interest rate hikes until the economy gains more traction. This is a bit of a worry as price inflation is on the rise in the UK and at last count, was clipping along at an annualized rate of 4 percent.

On the other side of the coin however, there is an argument that the recent spike in energy costs are largely responsible for the price increases which, when combined with a weak currency, drives the cost of energy higher. So long as “core” inflation remains acceptable, the need for an interest rate increase becomes less urgent.

Scott Boyd is a currency analysts and a regular contributor to the OANDA MarketPulse FX blog.

April 28 (Bloomberg) — Australian Resource Minister Martin Ferguson talks about the outlook for commodities demand and economic growth in Asia. He speaks with Francine Lacqua on Bloomberg Television’s “On The Move.”

By Russell Glaser

Yesterday’s UK Q1 GDP release helped to put the Bank of England hawks back in charge in the debate over monetary policy. This should support sterling in the near term as traders continue to favor currencies with rising rates. As such, the EUR/GBP uptrend is stalling at a significant resistance level and an increase in rate expectations will only server to turn the tide in favor of sterling.

Uncomfortably high levels of inflation near the BOE target of 4% are claimed to be caused by increases in energy and food prices. These pressures do not appear to be one off events according to the March CPI report that showed inflationary pressures rose on a year over year basis to 4%. While this is down from a previous release of 4.4%, this level of inflation still remains unsustainable in the long term.

The BOE has resisted pressures to raise interest rates and rightfully so. Any tightening of the accommodative monetary policy may have the effect of choking off the UK economic recovery prematurely. The previous GDP report underscored those fears as the UK economy contracted by -0.5% in Q4 2010. Yesterday’s release of British Q1 GDP of 0.5%, a level in-line with economists’ expectations shows the UK economy has sustained little growth over the past 6 months but does not appear in danger of falling back into the red.

This GDP report may help to solidify the position of the BOE MPC member hawks as they lobby for a UK interest rate increase. In turn this should support the pound with an increasing interest rate differential.

Looking at the daily chart of the EUR/GBP, the uptrend in February has stalled at the 0.8923 level for the second time this month creating a double top reversal pattern. Last October the pair suffered a similar fate as it was unable to garner much support above this price, rising to a high of 0.8940. An entry short may be appropriate with tight stop placed above this level. To the downside, support comes in at the current trend line at 0.8810, followed by the previous trend line from December 2008 high which is found at 0.8700.

Could it be that the royal wedding will also help to turn the tide in favor of the pound?

Forex Market Analysis provided by ForexYard.

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EURUSD touched 161.8% (1.4824) of 1.4517 to 1.4018 extensions on 1 hour chart. Now EURUSD will retrace from here toward 1.4606, 1.4435 or break of 1.4925 resistance further going up side toward 1.5350 next targets. Break of 1.4754 supports going down side toward 1.4606 on intraday. If EURUSD will reverse from 1.4606-1.4435 then extension at 1.5074, 1.5350 which is also 161.8% extension of 1.4288 to 1.2579. EURUSD reversed 78.6% (1.2984) extension 127.2% (1.4750), 161.8% (1.5350) of 1.4288 to 1.2579 still in progress.

New High:  1.4791, 1.4873, 1.4869.

New Low:  1.4628, 1.4710, 1.4706.

Pivot Point: R3-1.4900, R2-1.4839, R1-1.4800, PP-1.4738, S1-1.4675, S2-1.4637, S3-1.4575.

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Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.

April 28 (Bloomberg) — Jim O’Neill, chairman of Goldman Sachs Asset Management International, talks about the outlook for the economy. He speaks with Francine Lacqua on Bloomberg Television’s “On The Move.”

Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.