Investors Shift Out Of Risk Following Citigroup?s Stress Test Failure, Sending GBP USD Exchange Rate Down

Published: Thursday, 15 March 2012 09:00 BST - Written by John Cameron

STORY LINK Investors Shift Out Of Risk Following Citigroup?s Stress Test Failure, Sending GBP USD Exchange Rate Down

The US Dollar was the main beneficiary of a scaling back of global appetite for risk during yesterday’s session in the currency markets. This saw the GBP USD exchange rate trade down to 1.5654, close to a 2-month low. This shift into safe haven assets and in particular the US T-Bill, was partly elicited by the news that four US retail banks had failed the Federal Reserve’s latest stress test. The four included the giant institution, Citigroup, causing investors to fear the worst for the whole banking sector in the States – if Citi is experiencing balance sheet difficulties, then which other banks might be in trouble?
The Federal Reserve’s statement which followed the FOMC rate decision on Wednesday night, surprised the markets when it suggested that a third tranche of Quantitative Easing was unlikely in the near-term, at least. This caused the wobble in equities markets to begin, as many analysts have suggested that the go-ahead performance from world share markets in recent years has been fuelled by the unprecedented availability of easy credit from global central banks.

The return of ‘risk-off’ trading over the past 48 hours hit the Australian and New Zealand Dollars hard during yesterday’s session, sending the GBP NZD exchange rate all the way up to 1.9423 – a gain of over 1.5% on the day. The GBP AUD rate enjoyed a decent move forward to break key psychological resistance at 1.5000 for the first time since the second week of January.

Today’s session is likely to be dominated by the European Central Bank’s Monthly Report, which will be closely-watched for hints at future interest rate policy for the eurozone. Yesterday’s lower than anticipated whole of eurozone CPI inflation numbers showed at a monthly 1.5%, slightly below the expected 1.6%. If the ECB suggests that this affords it scope to consider a cut in its key lending rate, then the GBP EUR exchange rate will head further northwards.

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