The bond vigilantes have sharpened their knives since my previous article in October “All Eyes on the Euro”. Yields are reaching dangerous levels and investors are dumping Italian and Spanish bonds while previously untouched triple-A countries including France and Belgium have begun to come under pressure too. In fact the spread between France and Germany borrowing rates has jumped out to a record 188 basis points.
Ultimately the markets are pricing in a recession across the Euro zone which is considered practically unavoidable given almost every EU nation is implementing their own austerity package. As we reported here at FX Strategy on the 13th of November it’s in these darkest of hours that the Euro could become a long term play.
Another pairing of interest to us here at FX Strategy is the GBP/USD. The UK economy is massively exposed to the Euro zone – so if the Euro zone falls into recession then things get even tougher for the UK economy. If this scenario plays out then expect further pressure on the GBP/USD. Today the GBP was trading at US$1.5727, down 91pips.
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