The pound declined against the majors yesterday as political concerns about the future of the Cameron premiership as the fallout from the News International phone hacking scandal intensifies together with concerns about the risk to the UK economy from a double-dip recession in the second half of this year.
The pound came under heavy selling ahead of today’s second quarter UK gross domestic product data. The majority of analysts are expecting a sharp slowdown with some even suggesting the UK economy may have contracted in the second quarter of this year.
Meanwhile, a report from Markit showed soaring prices, higher debt levels and a reduction in cash available to spend contributed to the strain on household finances in July, with 38% of households noting a deteriorating financial situation.
Abroad, the risk rally sparked on Friday from optimistic noises from president Obama about the US debt ceiling talks and the announcement that the EU’s agreed a second bail-out of Greece quickly came to a halt as a deadlock in Washington over the debt ceiling negotiations turned the markets nervous and risk sentiment soured.
As a result the US dollar tumbled against the Swiss franc and the yen on Monday after the White House and Republicans leaders’ failed weekend talks to raise the US debt ceiling. Persistent wrangling over the $14.3 trillion US debt ceiling, with little more than a week before the 2 August deadline, sent jitters across the markets. Late Monday President Barack Obama said the deep budget cuts Republicans had outlined in their debt plan would do economic harm. In a televised speech Obama also blamed Republicans for the lack of a deal despite weeks spent trying to strike an agreement.
Not unexpectedly, the ultimate safe haven currency the Swiss franc hit a record high against the dollar. The Japanese yen’s safe haven appeal was also in demand, sending the currency to a four-month high against the dollar.
In Europe, Moody’s Investors Service downgraded Greece’s credit rating by another three notches to just one step above default saying that the new support programme will result in private creditors incurring “substantial economic” losses on their government debt holdings. The rating agency cut Greece’s local- and foreign-currency bond ratings to Ca from Caa1. Moody’s said it will re-assess the credit risk profile of any outstanding or new securities issued by the Greek government after the debt exchanges has been completed.
Moody’s signalled that the “probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%.”
On a positive note, however, the rating agency said the EU programme and proposed debt exchanges will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden. It also noted that the support package for Greece also benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
