Downgrade Risks Spread to Sterling and Euro

UK banks are the latest in focus on talk of Moodys downgrade of banks and public finance data , ratings downgrades continue to weigh on Euro.

With the focus being on the single currency over the past few days the UK comes back into the spotlight this morning ahead of tomorrows Q1 UK GDP revision with talk that ratings agency Moodys is looking at downgrading the debt of Britains banks as the deadline for the withdrawal of UK government support draws near. With Chinese ratings agency Dagong downgrading the UK from AA- to A+, outlook negative the recent strength in sterling could well be tested once again.

UK public finance data out for April, is also due out and is expected to show public sector net borrowing to have fallen to 4.4bn.

As these figures will be the first of the new fiscal year, markets will be looking for evidence of an improvement from the previous April figures, as evidence that the governments fiscal plans are on track, with the new tax rises and spending cuts starting to bite in earnest.

Against the US dollar the pound has trend line support at 1.6070 from last years May lows at 1.4230, while against the single currency it appears that its is in a range between 0.8650/0.8850.

If ratings downgrades at the end of last week werent enough, ratings agency Fitch carried on the theme yesterday by downgrading the outlook to negative for five Greek banks, and then turned its gaze on Belgium, downgrading its outlook to negative, citing higher political risk due to its lack of a government.

Markets are now going to have to deal with political risk becoming a factor when thinking about sovereign debt as voter resentment could well derail fiscal austerity and bring about political instability and possible defaults. The fallout from this weekends Spanish elections could well be the shape of things to come.

In an attempt to keep the bond vigilantes at bay and inspire some market confidence Greece announced the sales of two of its ports, Piraeus and Thessaloniki, as well as Hellenic Postbank as part of a first wave of privatisations.

In economic data out later German Q1 GDP is expected to be reaffirmed at 1.5%, however given yesterdays disappointing flash PMI data there is a concern that IFO expectations for May, which are expected to come in around 107, could actually come in lower significantly lower than the April figure of 107.7.

US new home sales for April are out this afternoon and given recent poor housing data it wouldnt be too much of a surprise if this were to disappoint as well.

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