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Foreign Exchange Rates ? GBP/EUR Edges Downwards as USD Remains Weak

March 7, 2011 - Written by John Cameron

The Pound Euro exchange rate (GBP/EUR) is 1.1.646.

In a significant development this morning, leading ratings agency Moody’s has downgraded Greek sovereign debt from B1 to Ba1. In an accompanying commentary, Moody’s alluded to the massive effort which will be needed by Greece to overcome its national debt crisis. Moody’s also expressed concerns that emergency measures enforced on the Greek economy have not been implemented quickly enough.

This Euro-negative development follows last week’s move by another ratings agency, Fitch, to alter the outlook for Spain to ‘negative’. The take-up for Spanish treasury bills at recent debt auctions has disappointed the markets, with a large amount of T-bills going unsold. Portuguese and Irish debt spreads have also risen dramatically in the last two weeks. Analysts will be looking to the upcoming ECB Debt Summit to provide some resolution to these issues, however, whilst uncertainty remains in the markets, the Euro will be susceptible to downside pressure.

The announcement by Fitch initially caused the Euro Dollar exchange rate (EUR/USD) to drop to below 1.3960, but it has since recovered to above the key 1.4000 level again. If the EUR/USD holds above this level, this may cause further support for the Euro against other currencies, including the Pound.

Looking at the other side of the GBP/EUR pair, the Pound continues to labour as the market downgrades its interest rate expectations for the UK. As recently as 10 days ago, futures markets were pricing in 88 basis points of interest rate cuts in the next 12 months. This has now been cut to 75 bps of cuts following comments from Bank of England Governor, Mervyn King, last week, which suggested that the Bank’s MPC is unanimous in believing that inflation will drop below the 2% target level in due course. King is scheduled to speak again tomorrow and at the end of the week, when further dovish comments are to be expected.

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