UK growth forecasts cut by ratings agency as market looks to ECB meeting on Thursday

Tom Tong01/Aug/2012Currency Updates

GBP

Yesterday saw a less than positive day for sterling as it lost ground versus both its euro and dollar counterparts.

The pound slipped lower by 0.15% against the euro on Tuesday as investors waited to see whether the European Central Bank would take bold action to tackle the eurozone debt crisis later this week. The ECB meeting on Thursday is expected by many to overshadow policy decisions by the BOE also taking place this week. With ECB President Mario Draghi recently stating that he would do “whatever it takes” to protect the euro, many investors believe that this has helped the common currency make gains versus sterling.

Sterling was further hit by Moody’s, as the credit agency cut its growth forecasts for the UK yesterday, claiming it was becoming harder for the government to stick to its austerity plans. However, the agency backed the UK’s commitment to reducing debt. On the plus-side, Moody’s did not change the UK’s triple-A rating, keeping its outlook as “negative”.

Sterling dipped 0.1 percent against the dollar, retreating from the five-week high seen on Friday and staying below chart resistance at its 200-day moving average.

Adding to the string of recent weak UK data, figures on Monday showed British mortgage approvals and lending had slumped in June.

EUR

The euro managed to climb against the dollar, sterling, and the yen on Tuesday, as tempered expectations surrounding this week’s European Central Bank meeting kept investors wary of betting aggressively on the single currency. Expectations of ECB bond buying have grown ever since its President Mario Draghi said last week the bank would do whatever it takes to save the euro, causing the shared currency to rise against the dollar in four out of the past five sessions.

It is said that if the ECB manages credible measures, it could boost investor appetite for taking on risk, helping the euro versus its competitors. However, if it disappoints markets it could lead to sharp falls in the single currency and other trades perceived as higher-risk.

In other news the International Monetary Fund said on Tuesday that the euro-area debt crisis has exacerbated global financial instability and an orderly adjustment process is likely to be prolonged and costly.

USD

Yesterday saw the US dollar lose ground versus the euro, but manage gains versus both the British pound and the Japanese yen as market players took to the sidelines before the start of the U.S. Federal Reserve Board’s monetary policy meeting.

It seems as though a wait and see mood has prevailed in the market ahead of the two-day Federal Open Market Committee meeting through Wednesday, the European Central Bank’s policy meeting Thursday, as well as Friday’s release of U.S. jobs data for July.

Tuesday saw very volitile trade between the dollar and the Indian rupee, with the Indian currency dropping by 7 paise, notwithstanding RBI announcing easing of norms with regards to retention of foreign exchange earnings.

Traders said sustained month-end dollar demand from importers amid RBI maintaining a status quo on key policy rates put pressure on the rupee.

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Written by Tom Tong

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