Dollar benefits from risk averse flows as market awaits UK GDP figures
The Euro’s troubles continued yesterday, as news emerged that leading credit ratings agency Moody’s has downgraded the debt of five of Spain’s regions including, perhaps surprisingly, Catalonia. Moody’s cited a generalised lack of liquidity amongst the five regionalised governments as the reason for their action. Predictably, this weakened EUR considerably as the Pound gained ground on the common currency moving it considerably away from Monday’s 5-month high. The Euro also lost ground against the US Dollar falling 0.6% as investors flocked to the greenback’s ever appealing safe haven blanket.
The greenback performed strongly yesterday, mainly due to ongoing fears regarding a generalised global economic slowdown and a potential debt flare-up in the Eurozone. This took GBP USD to its lowest level since the start September and investors holding US Dollar-denominated assets will remain wary following the data releases today.
If the FOMC’s policy statement tomorrow alludes to an extension to the Fed’s current $40bn pcm Quantitative Easing policy, then the Greenback’s gains could be rapidly reversed. Equally, any suggestion from Fed Chairman Ben Bernanke that a further loosening of US monetary policy is on the cards would be likely to have a similar effect.
Sterling hit a six-week low versus the dollar on Tuesday, tracking a weaker euro as weaker stocks and rising Spanish bond yields curbed demand for perceived riskier currencies. Strategists said falls in the pound were likely to be limited ahead of third quarter UK gross domestic product numbers on Thursday, expected to show the economy grew 0.6 percent after three consecutive quarters of contraction. Despite a run of better-than-expected data last week, the UK economy is still seen as vulnerable to lacklustre global growth and the effects of the euro zone debt crisis. Stirling gained back some ground against the Euro yesterday following the news from Spain in particular.