Dollar Aims Higher on Moody's Downgrades, Pound Eyes Inflation Data

Talking Points

• Dollar Soars on Haven Demand as Moody’s Threatens France, UK Credit Ratings
• Yen Declines After Bank of Japan Expands Asset Purchases, Sets Inflation Target
• Euro Likely to Look Past ZEW Improvement, All Eyes on Bond Auction Outcomes
• British Pound Vulnerable as Inflation Data Bolsters the Case for QE Expansion

The US Dollar (ticker: USDollar) pushed broadly higher in overnight trade as stocks declined, driving safe-haven demand for the benchmark currency. The MSCI Asia Pacific regional benchequities index fell 0.6 percent after Moody’s cut the credit ratings of six European Union countries including Italy, Portugal and Spain. France, Austria and the UK were assigned a “negative” outlook, meaning there is at least a 40 percent chance that the three countries would lose their AAA ratings over the coming 18 months. The Japanese Yen underperformed after the Bank of Japan expanded its asset its asset-purchase fund to ¥30 trillion and set an inflation target of 1 percent, signaling additional easing to come ahead.

Looking ahead, S&P 500 stock index futures are trading firmly lower ahead of the European opening bell, hinting continued risk aversion stands to continue driving the greenback higher at the expense of stocks-linked currencies. Spain, Italy and Greece will all hold bond auctions, with the outcomes likely to be treated as a gauge of perceived solvency risk in the region following the Moody’s downgrades.

On the economic data front, UK Consumer Price Index figures are expected to see the annual inflation rate drop to 3.6 percent in January, marking a 14-month low. As we discussed in our weekly forecast, the outcome stands to reinforce the case for an expansion of quantitative easing announced by the Bank of England last week and may weigh on the British Pound. Meanwhile, the German ZEW survey of investor confidence is forecast to see sentiment improve for the second month. The outcome may not offer much support to the Euro however if debt crisis fears continue to dominate the spotlight.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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