Moody gives the UK a negative outlook

Tom Tong16/Feb/2012Currency Updates

GBP

Despite Moody’s negative outlook for the UK’s credit rating and larger-than-expected rise in U.K. jobless claims dampening the outlook for future growth Sterling held above recent lows against the Dollar and cut its losses against the Euro on Wednesday, drawing support from the Bank of England’s latest inflation report which dampened expectations of further monetary stimulus.

However BoE Governor Mervyn King said there were downside risks to a UK economic recovery given the tight fiscal conditions at home and weakness in Britain’s major trading partners. Analysts said that given the UK’s high exposure and strong trade links to the Euro zone, sterling’s gains would be muted against the Dollar and as such many remain bearish about its prospects in the months ahead.

EUR

Eurozone finance ministers called for tighter measures to be taken on Greece as they were handed a 130bn EUR bailout package to prevent the country defaulting. The EU and IMF have also demanded that Greece make deep cuts and restructure its economy in return for the bailout. Ministers scrutinised Greece’s planned budget cuts as they were seen to be soft despite many other Eurozone members to be doing their up most to save the economy and prevent their collapse. A deadline set for mid-March has also been set to add further pressure on Greece as they are set to make repayments of 14.5bn-euro bond, or face bankruptcy.

Furthermore two of the eurozone’s biggest economies have fallen into recession, according to the latest economic figures. Italy and the Netherlands both saw their economies shrink by 0.7% in the fourth quarter; Germany had its first negative quarter since 2009 with a decline of 0.2%, compared with the previous quarter. In France there was surprise growth of 0.2% at the end of last year, attributed to healthy export growth. Overall the 17 nations that make up the eurozone saw economic activity shrink 0.3% in the fourth quarter. By comparison the United States reported growth of 0.7%.

USD

The Dollar showed renewed strength as investors fled out of risky assets amid doubts over Greece’s next bailout. This was despite minutes released yesterday from the Federal Reserve’s last policy meeting which showed that some policymakers stated the central bank could consider further asset purchases (QE3) to boost the economy.

However, there were solid reports released on US manufacturing activity which gave an initial boost to risk sentiment. The Empire State Manufacturing Index came out as a significant surprise to the upside at 19.5,

The greenback has shaken the selling pressure that has been in place since the year began, but a meaningful bid has yet to fill the void. Like most other benchmarks for risk appetite (whether safe haven or yield provider), the greenback is levelling off.

Despite initial losses, by the end of London trading, the Dollar was up 0.4% against the Euro.

Looking ahead, S&P 500 stock index futures are pointing sharply lower in late Asian hours, hinting continued risk aversion is likely to continue driving safe-haven currencies higher in the coming session. Today we can look forward to some key data coming out of the US, notably the Philly Fed Manufacturing Index, PPI, and Unemployment Claims.

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Written by Tom Tong

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