Sterling’s Reins Pulled

A deluge of rating downgrades has hit the Eurozone, with Fitch lowering its rating on Greece by one notch and Moody’s reducing its credit rating on sixteen Spanish banks. Meanwhile, Sterling continues its losing streak against the US Dollar following the BoE’s uninspiring quarterly inflation report. Additionally, US economic data released yesterday was disappointing and has turned the tide in favour of a potential QE3. With macro data on a light side today, markets are likely to take direction from news flow out of the Eurozone and the G8 meeting starting today.

Pound Sterling – UK Markets

The Pound continued to struggle against the US Dollar yesterday, as a downbeat quarterly inflation report by the BoE, released earlier this week, bolstered market speculation that the central bank might undertake further easing measures in the future. Additionally, David Cameron, the British Prime Minister, cautioned that the UK was not immune to the outcome of a Euro collapse. On the contrary Paul Fisher, the BoE policymaker, asserted that there was no case for additional QE, if the UK recession is mild. However, he expressed concerns over constant appreciation in Sterling being a threat to exports. In today’s trading session, the Pound has held against the Euro, amid concerns surrounding Greece and Spain. However, Sterling continues to remain under pressure against the US Dollar. With little on offer in terms of domestic economic releases today, market participants stay focused on next week’s economic calendar featuring revised GDP data, inflation and the minutes of the last BoE’s policy meeting.

US Dollar – US Markets

Persistent risk sentiment across markets has aided the US Dollar to register gains against the majors this morning. Rating downgrades on Greece and the Spanish banking sector, coupled with weak Chinese economic data, underpinned the global economic despair. On the data front, weaker than expected Philadelphia Fed manufacturing survey continued the recent trend of mixed messages on the strength of the US economy. The dismal manufacturing data from Philadelphia has dampened optimism following strong manufacturing growth in the New York region registered earlier this week. Key regional manufacturing data over the course of next week is expected to provide further cues about the state of the US manufacturing sector. Additionally, an unexpected decline in leading indicators index and unchanged initial jobless claims suggested that the US economic recovery is running out of steam. With no significant macro triggers on tap today, news flow emanating from the Eurozone is likely to provide direction for the US Dollar against the majors.

Euro – European Markets

Another bout of downgrades in Europe dragged the Euro down slightly against the majors this morning. Fitch lowered its sovereign rating on Greece to “CCC” from “B-” spurring exit concerns, while Moody’s fuelled fire by slashing its credit rating on 16 Spanish banks, including heavyweights such as Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA. The previous session saw Spain sliding into recession with yields soaring to riskier levels at its bond auctions. The nation’s government approved a deep spending reduction plan for its indebted regions and assured introduction of a new mechanism in July to back its financing needs. Data out this morning showed that German output producer price inflation eased for April to the lowest level in twenty-two months. The recent setback in regional elections and easing inflation worries could prompt the German government to alter its stance over adding more easing measures. Markets look forward to the G8 meeting starting today and steps undertaken to curb the Eurozone crisis from impacting the global economy.

Other Currencies – Highlights

The Aussie Dollar has retreated against the greenback in today’s trading session, as growing risk aversion has dampened demand for high yield currencies. Moreover, data indicating deterioration in Chinese business sentiment for May, along with weak housing data for April, has fuelled concerns over a slowdown in Australia’s largest trading partner and weighed on the Aussie Dollar. To add to the gloom, the recent rating cuts undertaken by Fitch and Moody’s have heightened sovereign debt worries and raised concerns that borrowing costs in other vulnerable nations in the Eurozone could move higher. In a move to pacify fears, Australian Prime Minister, Julia Gillard, affirmed confidence in the nation’s economy amid low unemployment and low inflation levels. However, she warned that strengthening of the Aussie Dollar will adversely impact the manufacturing and tourism sector.