Political uncertainty in Italy worries investors as Euro gives up recent gains.

Tom Tong26/Feb/2013Currency Updates

GBP

Following yesterday’s news it was inevitably a reactive day for sterling, due to the news off Moody’s downgrade of the AAA credit rating, producing evidence that the market has lost confidence in George Osbourne’s ability to retrieve the UK out of its current economic slump.

During Early-day trading yesterday we saw sterling plummet to a 30-month low against the greenback, also hitting a 16-month low against the euro. The pound has lost 7.0 and 7.5 per cent against the dollar and euro since the beginning of the year. Yesterday was dominated by news of the downgrade, but some analysts believe the decision may actually act as a release valve for the pressure that sterling has been recently under.

Sterling fell to its weakest since July 2012 against a basket of major currencies. Further decreases in the value of sterling were anticipated in the upcoming weeks due to the negative outlook for the British economy, the concept of the continuation of monetary easing and growing evidence that the Bank of England is comfortable with the falling currency as it attempts to rebalance the economy and encourage exports. Recent economic surveys forecast that the economy of the United States is to develop 1.9 % in 2013, whilst the United Kingdom is merely expected to grow at a more reluctant pace of 0.9 percent over the same period.
The general impression of a country losing its AAA rating is not looked upon as harsh as in recent times this has happened to several major economies.

Today we have the inflation report from The Treasury Committee, which is appointed by the House of Commons to examine the expenditure, administration and policy of HM Treasury, HM Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Services Authority.

EUR

The euro continued its decline against the dollar a further 1 % with the prospect of the upcoming elections creating uncertainty as Italy’s austerity reforms appeared in the presence of an upcoming election.

The focal point in relation to the euro is the Italian elections and what will happen to austerity measures implemented within Italy. The market has been viewing that quite favourably, so the concern with the election is that depending on the result, a portion of that may be taken away.

The euro’s rally faded after former Italian Prime Minister Silvio Berlusconi’s alliance had a strong showing in projections from the general election and extended its lead in the Senate race forcing the euro to lose gains against the dollar, and sharply pared gains against the yen. With regards to the market, many analysts have said the best case scenario would see a centre left coalition including Prime Minister Mario Monti as opposed to a strong showing by former Silvio Berlusconi, which could potentially unsettle markets. Today is a relatively quiet day with regards to the euro, with the majority of the focus based on the elections.

USD

The dollar has increased just below 4.0 percent over a year against a trade-weighted currency basket; this is down to volatility in substantial part because of economic weakness, fragility, and radical monetary policy in places like Japan, Europe and Britain. With the US economy in better cyclical and structural shape, the Fed will likely be the first central bank to exit QE.

Today we will see The Federal Governor, Ben Bernanke, give a press conference and give us indication as to how the Fed observes the current U.S. economy and the value of USD. His comments may influence the volatility and fluctuation of USD and determine a short-term positive or negative trend. His hawkish view is considered as positive, or bullish for the USD, whereas his dovish view is considered as negative for the Dollar.

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Written by Tom Tong

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