Risk Of Downgrade Weighs On Sterling

7 December, 2012

Simon Eastman

News desks were talking about the autumn budget all day, unsurprisingly, as it was pretty negative news for the UK economy. The pound lost plenty of ground on Wednesday in the currency markets and Thursday wasn’t much better.

The Halifax house price index was up nicely at 1%, compared to the expected 0.2% but this had little effect, as all the markets focused on, was the increasing potential for the UK to lose it’s AAA rating. Trade balance coming in an extra billion below the expectation at -£9.5 billion, helped the pound on a downward trend and the Bank of England policy results, remaining unchanged, did nothing to halt the poor run across the board.

A bad day for the pound, with the downgrade worries hanging like a noose around the neck, the rest of the year seems unlikely to be much better. For those looking to buy any major currency the prevailing downward trend needs something pretty special to buck, so it could well be worth looking to secure your rate sooner rather than later.

With such sterling negativity the markets awaited the European Central Bank policy statement. As expected, there was no change to interest rates or asset purchase but the subsequent press conference brought some surprises.

President Mario Draghi told the press they had considered cutting interest rates this month although decided against, but predicted Eurozone growth would continue to decline through 2013, leaving the door wide open for a rate cut early next year.They even considered cutting their deposit rate into negative figures, effectively charging banks to hold their money rather than paying interest.

This, as one would expect, was bad news for the Euro which proceeded to tumble as traders dumped the single currency in abundance. Pound/Euro exchange rates picked up by nearly a cent in the space of an hour before finding resistance and flatting out. Against the US dollar, the same story, falling by nearly a cent and a half.

The dollar also gained against the pound significantly, compared to recent trends, gaining back nearly one cent. The main reason for the US dollar’s gain was simply down to the weak euro, as we have often seen of late, the safe haven dollar has suffered when the riskier euro benefits (due to investor sentiment) and on Thursday the opposite occurred.

Today, we have a varied mix of data with UK industrial and manufacturing production figures along with the key consumer inflation expectations (a figure relased by the BoE giving a percentage that consumers expect the price of goods and services to change during the next 12 months).

In the Eurozone, Mario Draghi makes another speech, which could well compound Thursday’s press conference so anyone looking to send money to Europe, be prepared to jump if we see some attractive spikes.

Finally, across the pond, some Canadian employment data followed by the more eagerly awaited US employment data including the key non-farm payrolls figure. This can be wildly different to expectations giving some choppy trading ranges affecting both sterling and the euro.

To avoid the pitfalls throughout the day, with some friendly guidance on your upcoming currency requirement contact one of the traders at Currency Index today.