Euro slips on nagging debt worry, pound falters

 

The euro slipped on Wednesday on nagging worries about the euro zone's ability to tackle its debt crisis, while sterling trimmed gains made against the dollar after a new coalition UK government was formed.

The euro remained under selling pressure with investors still sceptical about whether the euro zone economies could deliver the drastic spending cuts and tax increases needed to get their fiscal houses in order.

Sterling slipped back from highs hit the previous day after Conservative leader David Cameron became Britain's new prime minister.

"It will take time to solve the fundamental problem of fiscal debt in the euro zone. And the euro is expected to be weighed down although some will probably buy on dips as short positions in the currency have accumulated" said Mitsuru Sahara, chief manager at the currency derivatives trading department at Bank of Tokyo-Mitsubishi UFJ.

"The market will continue to watch the degree of commitment of central banks in the euro zone economies and authorities such as the IMF to the debt problem in the area" he said.

The euro was trading around $1.2642, down 0.2 percent from late U.S. trade on Tuesday, having retreated from Monday's high near $1.3100. One near-term downside target for the euro may be around $1.2580, near Friday's low, said a trader at a Japanese bank.

In one potentially supportive factor, traders cited talk of a double no-touch option position in the euro with barriers at $1.25 and $1.31. Such a position suggests that the holder would buy euros on any drop towards $1.25 to defend that position until it expires.

Against the yen, the euro was down 0.1 percent at 117.30 yen, having fallen from above 122 yen touched earlier this week.

Euro/yen remains on a downtrend after its 21-day moving average slipped below the 65-day moving average on Tuesday, forming a so-called "death cross" a bearish sign, Bank of Tokyo-Mitsubishi UFJ FX analysts said in a note.

"The recent market is driven by political factors surrounding the euro and ups and downs of market tension, rather than economic indicators. It is hard to predict what will come next, making it difficult for traders to take risks" said Satoshi Okagawa, head of the forex and money trading group at Sumitomo Mitsui Banking in Singapore.

On the political front, Conservative party leader David Cameron took over as British prime minister after securing a power-sharing agreement between his centre-right party and the smaller Liberal Democrats.

Market players said they were keen to see if the Conservative-led government will take swift action to bring down spending.

Sterling slipped 0.1 percent to $1.4902 after rising above $1.5000 on Tuesday. The euro edged up 0.2 percent against sterling to 84.80 pence after falling 1.6 percent on Tuesday.

A drop below 84.28 pence would take the euro to its lowest in 11 months against sterling.