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Euro Slips to 10-Month Low as Fitch Cuts Credit Rating for Portugal, British Pound Extends Decline

Euro Slips to 10-Month Low as Fitch Cuts Credit Rating for Portugal, British Pound Extends Decline

2010-03-24 11:21:00
David Song, Currency Strategist
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Talking Points
•    Japanese Yen: Pushes Lower Against Most Currencies
•    Pound: All Eyes on U.K. Budget Statement
•    Euro: Service-Based Activity, Manufacturing Expands at Faster Pace
•    U.S. Dollar: Durable Goods Orders, New Home Sales on Tap

Euro Slips to 10-Month Low as Fitch Cuts Credit Rating for Portugal, British Pound Extends Decline


The Euro tumbled to a 10-month low of 1.3344 during the overnight trade as European policy makers favored the International Monetary Fund’s involvement in the bailout of Greece, and the single-currency could face increased volatility over the remainder of the week as the European Union kicks off its summit on Thursday. At the same time, Fitch Ratings downgraded Portugal’s sovereign credit rating to ‘AA-‘ from ‘AA’ on the “backdrop of relative macroeconomic and structural weaknesses,” and held a negative outlook for the region as policy makers in Europe expect to see an uneven recovery this year.

Meanwhile, European Central Bank board member Lorenzo Bini Smaghi opposed obtaining help from the IMF and argued that a bailout from the group could harm the euro during an interview with the Die Zeit newspaper in Germany. Nevertheless, the economic docket showed manufacturing in the Euro-Zone unexpectedly expanded at a face in March, with the PMI reading increasing to 56.3 from 54.2 in the previous month, while the gauge for service-based activity advanced to 53.7 from 51.8 to top forecasts for a rise to 52.0. As a result, the composite index pushed to 55.5 from 53.7 in February, which is the highest reading since August 2007, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. In addition, business confidence in Germany improved during the same period, with the headline reading increasing to 98.1 from 95.2 in February, while the IFO’s gauge for future expectations advanced to 101.9 from 100.9 amid projections for a flat reading. However, industrial new orders unexpectedly decline in January, with demands falling 2.0% after rising 0.8% in the previous month, while the annualized rate increased 7.0% from last year, which fell short of expectations for a 13.9% rise.

The British Pound extended the decline from the previous day to reach a low of 1.4934 against the greenback, but continued to maintain the narrow range carried over from the previous month ahead of the 2011 Budget Statement due out at 12:30 GMT. Chancellor of the Exchequer Alistair Darling is likely maintain his pledge to support the real economy as the private sector remains weak, and may shed little light on how he plans to cut the deficit in half over the next four years as policy makers continue to see a risk for a protracted recovery. Meanwhile, former Bank of England board member David Blanchflower said that if the U.K. lost its AAA credit rating, the market reaction to the downgrade may not be as “monumental” as some expect, and argued that the government should continue to support economy as the labor market remains weak.

The greenback continued to appreciate across the board, with the USD/JPY breaking out of its recent range to a fresh monthly high of 91.28, and the reserve currency may continue to strengthen going into the North American trade as investors scale back their appetite for risk. Nevertheless, demands for U.S. durable goods are expected to increase 0.6% in February after expanding 3.0% in the previous month, while new home sales are projected to increase 1.9% during the same period following the 11.2% contraction in January. As the data reinforces an improved outlook for global growth, we could see a shift in risk sentiment, which would stoke increased volatility in the major exchange rates, but it seems as though fundamental developments will playing an increased role going forward as the Federal Reserve aims to normalize policy this year.


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Forex Weekly Trading Forecast - 03.22.10


To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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