ForexSpace.com - Forex news sees the euro looking increasingly vulnerable to political uncertainty sweeping across Europe this morning. Notwithstanding the single currency’s continued holding pattern of weakness, however, (down over half a cent to $1.3010) considering the weekend’s political shenanigans across the currency bloc and their potential effects, Reuter’s FX analyst Neal Kimberley tells me how, in actual fact, he reckons the euro is holding up reasonably well.

“I wonder if that situation changes and we start to see it grind lower,” opines Kimberley, who adds: “Of course, there will be a wall of euro zone exporter bids in eurodollar 1.2950-1.3000. Adding hedges below 1.3000 make perfect sense. But those will be finite in size.”

Nonetheless, Jane Foley (pictured) of Rabobank explains how Greece, France and Spain are all alarming traders, who could send the euro lower. “News that public money will be used to bail out Bankia is the latest test for the Spanish government,” says Foley. “The risk, however, is that investors will see this as a signal that more bad news will follow from Spain's banking sector,” adds Foley, who concludes: “Against this backdrop we expect the euro to remain on the back foot for now and retain our forecast that dips towards EUR/USD1.28 are likely.”

So, with sterling hovering close to a three-and-a-half year high against the euro at the time of writing, (at €1.2395, with further gain likely) those Brits still with enough cash to venture into the near Continent will be getting excited at the prospect of totting up their holiday spending.

Step forward Mr Hollande’s much-vaunted 75 percent tax hike in France, which forex traders and top forex brokers alike are anticipating will help give EUR/GBP the impetus needed for it to break below the 80 level. As Pratima Desai of Thomson Reuters says: “Russian, Greek and Italian money looking for an escape to more accommodating climes has often opted for France alongside Britain. But France’s new President’s tax rhetoric – if he pushes it through – could see a lot of that money diverted to Britain, where Chancellor Osborne recently cut taxes for high earners.”

So, with the sterling flying high against the troubled euro, it – sterling – also continues to hold up relatively well against the greenback, albeit well off its highs amid strong euro to dollar flows. Thus we see the British currency now trading at one-and-a-half cents off last week’s highs of $1.63 amid a sharp eurodollar drop.

Nevertheless, as Richard Driver, Analyst with Caxton FX points outs: “The US dollar is on the front foot as you would expect, having made major gains on the euro over the weekend. This pair’s slight downtrend may persist today.

Against the Aussie, sterling helped itself to further gains amid risk off trading conditions, currently trading even higher against the AUD amid falling Asian stocks and negative global headlines. The euro zone elections have had a predictably negative impact on the aussie dollar. There has actually been some decent Australian data of late, with retail sales and building approvals both impressing, but some extremely  weak aussie trade balance data increased concerns over the aussie economy.

As for Sterling/NZD, the former saw further upside against the kiwi, as safer currencies top the market’s wish list. As Richard Driver explains: “Sterling’s latest rally has little to do with the domestic economy. The commodity currencies are all losing out to the pound, which has acquired fairly prominent safe-haven status this year. The fact that the UK economy has apparently re-entered recession has not concerned the market at all.”  

We also see the GBP trading higher against the loonie, which is under pressure from negative euro zone developments and weak US data. Last Friday’s key US employment data was disappointing and this saw the loonie and other risky assets sell-off as a result.

“The weekend’s worrying political news has ensured that the loonie remains on the back foot,” Driver says, concluding: “US equities have suffered a downward correction in recent sessions, a theme which could continue to weigh on the Canadian currency. Sterling is now trading at a 2012 high up toward 1.61, but we may see the loonie stabilise this week.” 

Drew Hillier. Editor