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The market’s attention has been dragged away from the Greece story overnight by the ratings agency Moody’s slamming the UK and Europe with a slew of downgrades. Italy, Spain and Portugal all saw their ratings cuts while the UK and France were warned that their AAA ratings were no longer guaranteed. The reason for these rating changes are not original and centre around risks to growth following austerity and fiscal consolidation. Unfortunately, from a political point of view in the UK, this will appeal to both government and opposition and we can look forward to further quarrelling surrounding the method that the UK should adopt to dig itself out of its budgetary mess.

We reckon that this will not have too much impact on markets in the long term. These concerns aren’t new to any extent, and certainly in Europe, the situation has started to improve since the turn of the year. Even so, sterling assets have taken a hit with the pound lower this morning and the yield on UK 10yr debt slightly higher.

It was going to be an interesting day anyway for the pound with the latest inflation numbers from the UK due at 09.30. CPI is expected to fall to 3.6%, the lowest level in a year, as this will be the first reading within which the increased VAT rate is not counted. In light of the Bank of England’s recent decision to increase the level of asset purchases, it is obvious that with inflation coming more under control that policy can remain accommodative in the UK for a while longer and this feeds through to our expectation that further QE will come from the MPC in May.

The Bank of Japan have also decided that monetary policy needs to remain weak going forward. As we highlighted yesterday, Japanese GDP fell by 0.6% in Q4 and the pressure to weaken the yen would have reached an almighty cacophony. The Bank of Japan has added 10trn yen to its QE fund and set an inflation target of 1%. The normally staid USDJPY is 0.5% higher on the session while sterling has gained around 0.2% against the yen.

Quickly on Greece, the uptick in sentiment the market received had largely dwindled away by the close of play yesterday as investors realised that this is but one of the many hoops that Greece has to jump through in the coming weeks and a resolution is by no means certain. Political risk is still what scares people and the notion that we would see a new government in Greece, following April’s elections, want to yet again renegotiate the terms of a bailout has caused the bulls to check their exuberance.

Other announcements to watch out for today include the German ZEW survey for February (10.00) which should show an increase in prospects following the good start to the year for European assets. US retail sales are also due at 13.30.

Indicative Rates Sell Buy
GBPEUR 1.1934 1.1961
GBPUSD 1.5713 1.5736
EURUSD 1.3149 1.3171
GBPJPY 122.36 122.63
GBPAUD 1.4691 1.4716
GBPNZD 1.8910 1.8937
GBPCAD 1.5724 1.5733
NZDUSD 0.8295 0.8317
GBPZAR 12.13 12.18
USDZAR 7.7101 7.7634
GBPPLN 4.9968 5.0231
EURJPY 102.39 102.65

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