UK Rating Takes a Negative Blow

Markets were caught unaware late yesterday as Fitch Ratings cut its outlook on UK’s “AAA” sovereign credit rating to “Negative” from “Stable”, citing multiple risks to the economy. The timing of the downgrade could not be worse considering yesterday’s downbeat domestic labour market report. This has indeed raised uncertainty about BoE action given the recent improvement in the housing market. With little in terms of UK economic releases today, markets are expected to take cues from bond auctions in Spain and France, meeting of the IMF to approve the Greek loan and key economic releases in the US due later today.

Pound Sterling – UK Markets

Sterling has retreated against both the Euro and the US Dollar after Fitch lowered its outlook on Britain’s credit rating to “Negative” from “Stable”, thereby elevating concerns that the UK may lose its top credit rating in the future. The rating agency warned that there is a “slightly greater” than 50% chance that its “AAA” rating will be reduced within the next two years due to high debt levels, weak economic recovery and threat from the Eurozone debt crisis. Fitch’s action comes on the back of yesterday’s downbeat jobless claims figure in the UK. Signs from the labour market are not encouraging as unemployment languished at the highest rate in 16 years. However, worrying signals from the job market has spurred optimism that Chancellor, George Osborne, may offer tax cuts in his annual budget due next week.

US Dollar – US Markets

The US Dollar has declined against the Euro this morning amid optimism that the IMF may approve a €28 billion loan for Greece later today. However, concerns over global growth prospects remain elevated as foreign direct investment in China for February declined for the fourth straight month. Against the backdrop of the recent upbeat non-farm payrolls and the Federal Reserve’s positive assessment of the economy, today’s jobless claims is expected to be closely watched by market participants for further cues on the health of the labour market. Markets expect data to indicate that fewer Americans filed for unemployment benefits last week. Other economic releases on tap today include produce price index, Philadelphia Federal manufacturing survey, NY Empire State manufacturing index and total net TIC flows.

Euro – European Markets

The Euro has strengthened against the US Dollar amid reports that the IMF board may approve a €28 billion debt package for Greece at its meeting due later today. To add to the positive tone, yesterday’s successful Italian bond auction, with yields at their lowest since October 2010, suggested that market participants were turning more upbeat following the recent Greek debt restructuring deal. The focus now is on Spanish and French bond auctions due later today. Markets also await the quarterly set of employment numbers in the Eurozone scheduled for release later today. Yesterday, Eurozone inflation came in line with market estimates while the region’s industrial production registered a lower-than-expected growth. The outcome of the IMF meeting and bond auctions in Europe are likely to set the tone for the Euro against the majors in today’s trading session.

Other Currencies – Highlights

The Swiss Franc has gained against the Pound and the US Dollar amid signs of improvement in the Swiss economy. Switzerland's State Secretariat for Economics (SECO) raised its 2012 economic growth forecast to 0.8%, compared to its previous estimate for a 0.5% growth. Yesterday’s ZEW survey indicating sharp improvement in the Swiss economic expectation index for March provided further buoyancy to the Swiss Franc. Meanwhile, the Swiss National Bank (SNB), in its policy meeting today, kept its benchmark interest rate unchanged at 0% and indicated that it would continue to enforce the minimum exchange rate of 1.20 Francs per Euro.