Foreign Exchange Rates - GBP USD Down as Risk Sentiment Ebbs on Concerns Over US Deficit

April 19, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Rates - GBP USD Down as Risk Sentiment Ebbs on Concerns Over US Deficit

The Pound Euro exchange rate (GBP EUR) is 1.1420. The Pound Dollar exchange rate (GBP USD) is 1.6299.

Global equities markets have plummeted in the last 24 hours, with the FTSE 100 closing yesterday’s session down by 2.10%, whilst the S&P500 lost 1.10% on the day. Asian equities markets followed suit during last night’s session.

The dip in global risk sentiment was caused by the release of an extremely negative statement regarding the future prospects for the US economy by leading ratings agency Standard & Poor’s yesterday.

Although S&P maintained the world’s leading economy’s AAA debt rating, they downgraded their assessment of the US economy from ’stable’ to ‘negative’ on fears over the size of the domestic budget deficit and current levels of government indebtedness. The report went on to express concerns about the ability of the US to tackle its massive deficit, due to a lack of consensus from Democrat and Republican policy-makers. S&P concluded by issuing a warning that US debt could be downgraded within two years.

Elsewhere, the Reserve Bank of Australia’s minutes for its last policy meeting, which were released overnight, have caused some selling pressure on the Australian Dollar. The minutes stated that the RBA considers the current level of interest rates as ‘appropriate’, which is central bank language for ‘do not expect any rate rises any time soon’. The RBA also warned of possible slower-than-anticipated Q1 growth due to adverse weather conditions in Australia, adding to the prevailing sense of gloom which currently hangs over the markets.

Yesterday’s spike in risk aversion had the immediate effect of strengthening the US Dollar, with the GBP USD rate falling further away from it’s near-term high of 1.6428. Today’s session could see further Dollar strength and increased selling pressure on the high-yielders and in particular the Australian Dollar, which may suffer following the relatively dovish tone of last night’s central bank minutes. Look for an improvement on the GBP AUD, GBP NZD and GBP ZAR rates.

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