Downgrade Greece to Lowest Credit Rating

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The global financial markets in the remnants of the credit crunch and recession are very much that saying about war: long periods of boredom punctuated by moments of sheer chaos and terror. Yesterday was definitely one of the former with assets moving little over the course of the trading session.

As we pointed out yesterday the European debt crisis was once again back in the spotlight and this was highlighted by the Standard & Poor’s downgrading Greece’s credit rating to CCC, the lowest active credit rating in the world at the moment. The ratings agency also weighed on the debate over whether private investors would need to take a ‘haircut’ on their holdings calling the results a “de facto default”. The euro is weaker this morning against the pound.

There is political risk also shading the single currency this morning after the government backed referendums on nuclear power, water industry privatisation and court protection for politicians failing. This adds to pressure that Berlusconi finds himself under following investigations of his private life and the local election failures in Milan. There is also talk of a credit rating downgrade for Belgium today.

Despite poor data overnight with the RICS house price balance showing that the housing market, particularly that outside London, slowing massively the pound has moved onwards. In part, this may be as a result of slow buying conditions in the period through the recent spate of bank holidays. Even so, it looks unlikely that we will see price growth in housing stock in the next few years given the prospects for interest rate increases and inflation remaining toppy.

While we are on inflation, we get the latest reading of UK CPI today at 09.30. The markets expect the level to stay at 4.5% and we see no reason to be negative against this. UK inflation has been notoriously ‘sticky’ in recent years and therefore if there is a risk then it is too the upside. We would expect a print at 4.5% to be slightly negative for GBP as some traders will still be betting on an interest rate rise sooner rather than later. These positions would have been backed up by a speech from MPC member Martin Weale yesterday that said that a “rate rise now would mean looser policy over the next 3 years” and “reduce speculation that the Bank has departed from its inflation mandate”. Unfortunately Mr. Weale remains in the minority on the MPC.

Apart from UK CPI, we also have US retail sales (13.30), a meeting of EU finance ministers (18.00) and debt auctions from Spain and Greece

Indicative Rates Sell Buy
GBPEUR 1.1347 1.1374
GBPUSD 1.6423 1.6448
EURUSD 1.4456 1.4474
GBPJPY 132.02 132.27
GBPAUD 1.5409 1.5449
GBPNZD 2.0061 2.0091
GBPCAD 1.5976 1.6007
NZDUSD 0.8175 0.8196
GBPZAR 11.06 11.11
USDZAR 6.7327 6.7627
GBPPLN 4.4473 4.4736
EURJPY 116.22 116.47

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