Dollar Gains on Spain Rating Cut, US GDP Report on Tap Ahead

Dollar Gains on Spain Rating Cut, US GDP Report on Tap Ahead

Talking Points

• Dollar, Yen Gain on Haven Demand as SP Cuts Spain’s Credit Rating
• US GDP Report May Force FX Markets to Rethink Likelihood of QE3
• Italian Bond Yields on Returning Credit Stress Ahead of Debt Auction

The US Dollar (ticker: USDollar) and Japanese Yen outperformed in overnight as Asian stocks declined, boosting demand for the go-to safe haven currencies, after Standard Poor’s cut Spain’s sovereign credit rating and assigned it a negative outlook, saying a recession will undermine the government’s ability to reduce the budget deficit. Eurozone crisis fears overshadowed would-be downward pressure on the Yen after the Bank of Japan expanded its stimulus efforts by a cumulative ¥10 trillion yen, broadly in line with market expectations.

Futures tracking key European stock indexes and the SP 500 are sharply lower, hinting the risk-averse is set to carry forward into Wall Street trade. On the data calendar, the focus is first-quarter US Gross Domestic Product figures, where expectations point to a 2.5 percent annualized quarterly increase after a 3 percent rise in the three months through December.

The result is likely to be interpreted in the context of this week’s FOMC policy meeting, with a better-than-expected outcome carrying the possibility of reminding traders that Ben Bernanke’s commentary was hardly as supportive of QE3 as traders’ initial reaction suggested. Alternatively, a disappointing print will further fuel stimulus bets and may renewed downward pressure on the greenback.

Elsewhere, an Italian bond auction will be interesting to watch as Eurozone debt crisis fears heat up anew. Rome is scheduled to sell a tranche of 2016-2022 debt, with investors keeping a close eye on average yield levels to gauge the severity of returning funding stress. The spread between yields on benchmark German 10-year bonds and Italian equivalents rose 14bps ahead of the sale, tapping a three-month high at 410bps.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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