Moody’s downgrades Spain; markets eye today’s BoE rate decision

Tom Tong10/Mar/2011Currency Updates

Overview:

The main currency markets saw relatively little volatility yesterday as there was a lack of headline data. Sterling gained 0.1% against the euro and 0.5% against the dollar as markets await the outcome of today’s MPC rate decision. Last month saw those voting for a hike increase to 3 out of the 9 votes. Although the main market focus will be on the interest rate decision, there is also both industrial and manufacturing production data due out at 09:30. Other data to watch out for will be the US trade balance and jobless claims released at 13:30.

GBP

The pending interest rate decision seems to have preoccupied the market somewhat. The market consensus seems to be for the MPC to leave rates unchanged at 0.5%. The real focus this month will be on the minutes from the meeting in a fortnight’s time. Last month’s inflation number put the consumer price index at 4% – the recent spike in commodity prices can only add to this pressure. With the recent indications that the ECB may well start hiking their rate at the next meeting, many expect to see signals that the Bank of England will follow suit. In terms of the other UK data the market expects manufacturing production to up by 0.8% (month on month) and Industrial Production to be up by 0.5% (month on month).

EUR

The euro seems to have found a level of resistance against both sterling and the dollar. The euro had rallied aggressively at the end of last week as Trichet had given strong indications that the European Central Bank may well hike interest rates as soon as this month’s rate decision meeting. However, this week has seen the return of uncertainty regarding the European sovereign debt crisis. Furthermore, this morning Moody’s downgraded Spain’s credit rating from AA1 to AA2 and has also warned of further cuts on the belief that bank restructuring will cost double the government’s expectations – 40 billion euros. This can only dilute the bullish euro sentiment that we saw last week. The euro gained 0.4% against the dollar but pulled back by 0.1% against the pound.

USD

The dollar again seemed to be the loser on the day as it pulled back against both sterling and the euro. This seems to reflect the markets view that both the European Central Bank and the Bank of England will have to move their respective policy stances to tackle inflation. The dollar also seems to be suffering a bit of a cold caused by the recent uncertainties across the Middle East. The main US Data release is the US trade deficit data, the market is expecting this to show a trade deficit of -$41.1 billion when it is released at 13:30.

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Written by Tom Tong

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