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British Pound Halts Five-Day Rally as Fitch Sees Risk for UK’s Credit Rating

The British pound halted the five-day rally against the greenback and tumbled to a low of 1.6601 as Fitch Ratings held a cautious outlook for the U.K. and said the country’s AAA sovereign credit rating is at risk as the nation needs “the largest budget adjustment” amongst the industrialized countries.

Talking Points
•    Japanese Yen: Weakens Across the Board
•    Pound: Fitch Sees U.K. Credit Rating At Risk
•    Euro: Investor Confidence Falters, Price Pressures Weaken Further
•    US Dollar: IBD/TIPP Economic Optimism, Fed Speeches on Tap

British Pound Halts Five-Day Rally as Fitch Sees Risk for UK’s Credit Rating

The British pound halted the five-day rally against the greenback and tumbled to a low of 1.6601 as Fitch Ratings held a cautious outlook for the U.K. and said the country’s AAA sovereign credit rating is at risk as the nation needs “the largest budget adjustment” amongst the industrialized countries. Nevertheless, Fitch’s head of global sovereign ratings, David Riley, expects policy makers in the country to “articulate a stronger fiscal consolidation program next year and sees a “stable” outlook for the nation’s rating as Chancellor of the Exchequer Alistair Darling pledges to shore up the government’s balance sheet.

Meanwhile, the economic docket reinforced an improved outlook for the region as the BRC retail sales monitor increased at an annual pace of 5.9% in October after rising 4.9% in the previous month, while the RICS house price balance index jumped 34% after rising 21% in September to top expectations for a 28% rise. At the same time, the visible trade deficit widened more-than-expected in September, with the shortfall rising to 7.194B from 6.073B as imports outpaced the rise in exports, while the DCLG housing index showed prices slipped at an annualized pace of 4.1% during the same period amid expectations for a 4.9% drop. As growth prospects improve, the GBP/USD may continue to trend higher over the near-term and retrace the sell-off from August as policy makers see the economy emerging from the worst recession since the post-war period, and long-term expectations for higher interest rates in the U.K. may drive the exchange rate higher going into the following year.

The euro bounced back from the low (1.4950) and reached a high of 1.5022 during the overnight session, but the lack of momentum to break above the previous days high may keep the single-currency within a narrow range going into the U.S. trade as market sentiment wavers. Meanwhile, the German ZEW investor confidence survey weakened more-than-expected in November, with the headline reading slipping to 51.1 from 56.0, while the gauge of the current situation increased to -65.6 from -72.2 to top expectations for a rise to -70.0. At the same time, the ZEW survey for the Euro-Zone slipped to 51.8 from 56.9 amid forecasts for a rise to 58.0, and the data suggests investors are scaling back their outlook for future growth as policy makers continue to see a risk for a protracted recovery. Moreover, the final CPI reading for Europe’s largest economy showed price increased 0.1% in October, with the annual rate of inflation holding flat during the month, while core prices weakened 0.1% from the previous year. In addition, wholesale prices in the region fell 0.4% during the same period after slipping 0.2% in September, with prices tumbling 7.0% from the previous year, and the data reinforces a dovish outlook for future policy as the European Central Bank expects inflation to remain subdued going into 2010.

U.S. dollar price action was mixed overnight, with the greenback rallying against the Japanese yen to reach a high of 90.20 however, the reserve currency may lack direction going into the North American session as U.S. equity futures remain little changed on Tuesday. Nevertheless, central officials will be on the wires throughout the day, with Federal Reserve Bank of Atlanta President Dennis Lockhart scheduled to speak at 14:15 GMT, while Federal Reserve Bank of San Francisco President Janet Yellen will discuss the economic outlook for the U.S. at 15:05 GMT. At the same time, the IBD/TIPP economic optimism index is expected to rise to 49.0 in November from 48.7 in the previous month as the world’s largest economy emerges from the worst recession since the Great Depression.


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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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