Sterling drops against dollar as investors lose risk appetite

Tom Tong07/Jul/2011Currency Updates

GBP

Sterling lost ground against the dollar on Wednesday as risk appetite subsided among investors following on from a Chinese rate hike and renewed concerns over Eurozone peripheral debt led investors to shed risky assets. It is also worth noting that the dollar rally is also relative to expectations of a strong Non-Farm Payrolls figure on Friday. Meanwhile, sterling gained against the euro by around 1% as the market digested news of Moody’s downgrading of the Portuguese credit rating to “Junk Status”. The markets will now await today’s respective interest rate decisions from both the Bank of England and European Central Bank with UK rates expected to be held at 0.5% and the Eurozone rate hiked to 1.5%.

EUR

The euro remained under selling pressure after credit ratings agency Moody’s downgraded Portugal’s credit rating to junk late on Tuesday. Adding to the published intention of agencies Moody’s and Fitch to downgrade Greece to default status over accepting its bailout package, this negative sentiment has  eroded the previous factoring-in of today’s expected ECB interest rate hike as investors previous increase for risk appetite may look to be subdued. Against the dollar, the euro fell by over 1.25% as a combination of the weak Eurozone news flow and the expectations of a strong Non-Farm payrolls number on Friday lead to the dollar being heavily bid. Against sterling the euro closed down by over 1%. The Eurozone data focus will be on the expected Eurozone rate hike to 1.5% at 12:45. As usual the market will be watching for linguistic signs such as “Strong Vigilance” in Trichet’s following press conference.

USD

ISM non-manufacturing survey headline figures came in worse than expected and the weakened pace of growth further confirms that the US economy has entered a ‘soft patch’, which will enviably prevent the FOMC from raising interest rates. Despite this, the dollar benefited in yesterday‘s session from its safe haven status and jumped 0.8% against the euro – the downgrade of Portugal’s credit rating to junk status can be attributed to the source of risk aversion.

However, risk aversion was not the sole reason behind the USD’s improved performance; Chinese rate hikes raised concerns amongst investors believing that this could have a negative growth on global growth.

Today sees ADP’s version of non-farm payrolls, the market is expects to see a 67,000 gain following this is the weekly initial jobless claims –predicted to fall from 421,000 from 428,000 last week.

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Written by Tom Tong

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