July 15, 2014 / 10:30 AM / in 3 years

FOREX-Euro drops after German ZEW survey, sterling outperforms

4 Min Read

(Recasts, updates with dresh quotes)
    * Euro drops on ZEW survey, Portuguese banking worries
    * Fed chief to testify to Congress on Tuesday, Wednesday
    * Sterling rises after UK inflation jumps

    By Anirban Nag
    LONDON, July 15 (Reuters) - The euro fell on Tuesday, after
Germany's ZEW survey suggested a shaky start for Europe's
largest economy in the third quarter while lingering problems
about Portugal's largest listed bank kept investors wary of the
single currency.
    Portuguese 10-year bond yields rose as shares in
Banco Espirito Santo fell more than 10 percent, with
investors worried about the bank's exposure to the troubled
companies of its founding family.
    So far, there are few signs that these troubles are spilling
over to other southern European countries. Nevertheless, they
reminded investors that the banking sector and debt troubles in
Europe are far from over.
    The euro fell to a one-week low against the dollar,
dropping to $1.3587. It was down 0.1 percent lower against the
yen at 138 yen and 0.5 percent weaker against the
British pound, with sterling getting a boost from a
jump in UK inflation.
    Germany's investor morale survey was the highlight in the
European session. ZEW's survey of economic sentiment fell to
27.1 in July, its lowest in 1-1/2 years and missing consensus
for a reading of 28. A separate gauge of current conditions fell
to 61.8 from 67.7 in June, undershooting forecasts. 
    "The ZEW was pretty disappointing," said Jeremy Stretch,
head of currency strategy at CIBC World Markets. "But for the
euro/dollar to head lower, we clearly need something from
Yellen."
    Investors are awaiting the congressional testimony from
Federal Reserve Chair Janet Yellen later in the day. They will
examine Yellen's remarks for clues on the timing of interest
rate rises, after U.S. data in the second quarter signalled the
economy was gaining momentum.
    Private-sector jobs and non-farm payrolls growth in June
were better than economists had expected and the unemployment
rate fell to a near-six-year low of 6.1 percent. But wage
inflation is still subdued, giving ammunition to policymakers to
keep rates lower for longer.
    
    STERLING SHINES 
    The euro's losses were much deeper against the British pound
which outperformed after data showed a jump in UK inflation.
    Consumer prices rose 1.9 percent on the year in June, the
Office for National Statistics said, beating expectation for a 
1.6 percent reading. 
    Sterling surged to a day's high of $1.7147 after the data
from $1.7078 beforehand, up 0.3 percent and within
touching distance of a near six-year high of $1.1780 hit earlier
this month. The euro fell to a one-week low of 79.27
pence from 79.755 beforehand, down 0.5 percent. 
    "Clearly the better way to short the euro is against the
pound as it captures the divergence in monetary policy outlook,"
added CIBC's Stretch.
    The inflation data adds pressure on the BoE to tighten
policy. In contrast, the euro zone is still grappling with
disinflation and the ECB is likely to keep policy accommodative.
    The yen held its ground after the Bank of Japan sounded some
cautious notes on growth but stopped well short of hinting at a
new bout of money-printing. 
    Governor Haruhiko Kuroda told reporters Japan was only
halfway to meeting the 2 percent price target and the bank would
maintain the quantitative easing programme until the target was
met. He added there was no reason for the yen to strengthen.
   The dollar was flat at 101.55 yen, well off last
week's seven-week low of 101.06 yen.
    "The BOJ have essentially backed off the idea of
quantitative easing for now but are sending some cautious
signals on growth," said Simon Derrick, head of currency
strategy at BNY Mellon.   

 (Additional reporting by Patrick Graham editing by Nigel
Stephenson and Ralph Boulton)

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