US House passes debt limit deal

Tom Tong02/Aug/2011Currency Updates

GPB

Sterling fell broadly on Monday after data showed UK manufacturing activity (PMI) shrank in July for the first time in two years.

Traders confirmed the pound came under further pressure in afternoon dealing as safe-haven currencies such as the Swiss franc and the yen outperformed in thin trading. Many banks are reporting earnings this week and PPI (Payment Protection Insurance) means that losses are expected in the UK. HSBC are cutting 30,000 jobs in 3 years in Europe by 2013.

USD

As anticipated the US debt deal looks like it will be passed today in the final hour with a strong majority, averting what could have been an unprecedented global financial catastrophe. As it stands the legislation is for the debt ceiling to be raised until 2013 and spending to be cut by $2,4trn over the next 10 years. On the back of this we could see the greenback rally against all other currencies. This has also had a calming effect on all European bond markets.

America is still not out of the woods though as two ratings agencies have stated that in order for the country to keep its AAA credit rating then $4trn would be needed to avoid the downgrade. This downgrade could see some very negative consequences for the economy and have some funds forced to offload their US treasuries if they have a legal mandate that only allows them to hold AAA rated debt.

EUR

With the majority of eyes firmly focused on what’s happening in the US and which direction the market will be moved by the outcome of the Senate, one eye still has to be looking over the Eurozone.

The main news this morning is that the ratings agency Moody’s is currently in the process of reviewing Spain, with a view to downgrading the country as growing concerns are appearing as to whether they will be able to meet their payments. This prompted the euro to lose ground against the pound yesterday and this figure was pushed further as disappointing manufacturing data came out of the Eurozone. The general message and mood across the market especially with investors remain wary about the single currency given lingering concerns over sovereign debt.
This is supported by the Eurozone debt crisis which is in full swing as Italian and Spanish debt yields are approaching the danger zone of 7% – and with further plans being implemented to prevent Greece needing a second bailout. There is also a view to Ireland and Portugal being ringfenced in order to reduce the costs of their emergency funding. In short, the ECB is going to track interest rates closer to Germany’s economic growth to support the five sovereign debt pillars of the Eurozone and are due to meet later this month to discuss this matter further.

We anticipate there to be a lot of volatility in the market over the course of this week, especially today regarding the data out of the US. Sterling has already rallied against the euro this morning off the back of this data, but this is not to say that this positive news from across the Atlantic will not push the market in the opposite direction and see the euro strengthen.

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Written by Tom Tong

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