Forex - UK Ratings Back in the Spotlight

Markets continue to trade at their unhurried summer pace with no signs that we’ll encounter any directional momentum today. The highlight of yesterday’s trading day was the BoE MPC Posen addressing comments advanced by S&P regarding the UK’s cherished AAA sovereign rating. S&P asserted that UK debt levels were approaching levels incompatible with their AAA rating. Posen later addressed fears that the UK could fall back into economic recession and further warned that recent austerity measures across the EU could weigh on the UK’s fragile recovery.

Should the UK government fail to develop a concrete strategy, the nation’s risk-free rating could be in jeopardy – something we’ve seen quite a bit of in the EU. As can be expected, the GBP has come under noticeable selling pressure. Sterling continues to struggle with the market’s shifting views on the inflationary path set by the BoE holding rates low and steady for an extended period of time. The ill-timed comments by S&P just exacerbated GBP selling mostly due to apprehension already present in the marketplace.

In the near term, we expect GBPUSD to be sold on any rallies as MPC members fail to follow Sentence’s call to raise rates and the fact that sovereign debt fears will likely cloud any positive developments.

In the Eurozone, recent ECB data demonstrated that the central bank only purchased €1 billion worth of Eurozone bonds as part of its Securities Market program. The figure represents a significant deceleration in bond intervention and potentially signals a quazi-return to normalcy. Portugal was downgraded today by Moody’s to the A1 level with a “stable” outlook for the future.

Fitches holds Portugal 1 notch above A1 while the S&P relegates the small nation 2 levels below. While the “stable” outlook should calm markets, the initial knee-jerk reaction sent the EURUSD down 25 points. Portugal’s growth is likely to remain weak until structural reforms are implemented and effective.

Lastly, Greece is due to auction off €1.25bn of its own debt today on the open market. Should the rate close below 5%, this would be a positive sign of returning investor confidence and broadly Euro positive.


SOURCE:http://www.ac-markets.com/forex-news/forex-2010-7-13.aspx