Dollar Wobbles After US Credit Rating Downgrade

Sterling Drops against Euro and Dollar as Investors Fear a Dovish Turn at the BoE

Sterling was offered against the Euro and Dollar as investors reduced exposure ahead of Thursday's Bank of England decision where anything other than a 50 basis point interest rate hike could result in declines according to some currency market professionals. GBP/EUR has retreated to €1.1624 while Cable fell by over half a per cent yesterday to $1.2753. "With expectations split down the middle between a 25bp and a 50bp move, that pretty much guarantees a reaction," says Kit Juckes, an analyst at Société Générale. Juckes says the Pound is vulnerable if the Bank of England doesn't hike by 50bp. "Given where expectations are that leaves GBP vulnerable this week. 25bp from the Bank, and solid US data, could easily drag GBP/USD back below $1.25," he warns. Kristian Brauten-Smith, an FX trader at Goldman Sachs says the Pound would likely retreat on anything but a 50bp hike as the Bank of England would risk squandering the credibility it has been fighting to restore. Brauten-Smith explains the Pound has a tendency to suffer on BoE meetings despite the cumulative delivery of hikes over the past 12 months being the greatest in G10.

No major data.

ECB radio silence not helping the Euro

EUR/USD remains a Dollar story and with the US data calendar about to pick up (ADP, ISM services, payrolls), the Dollar leg should remain dominant given that most key Eurozone data was already published earlier this week. The calendar of ECB speakers continues to show only Fabio Panetta tomorrow, and he is the most dovish voice, so unlikely to lift rate expectations. The US credit downgrade helped EUR/USD avert a move below $1.0950, but more pressure on the pair is definitely on the cards should US data prove robust. A test of $1.0900 by the end of the week seems feasible.

No major data.

Dollar mixed as strong US data cancelled out by Fitch downgrade

The Dollar struggled to make headway this morning after a cut on the U.S. government's top credit rating by Fitch raised questions about the country's fiscal outlook, though it drew some support from a relatively resilient run of economic data. Rating agency Fitch yesterday downgraded the United States to AA+ from AAA in a move that drew an angry response from the White House and surprised investors, coming despite the resolution two months ago of the debt ceiling crisis. That nudged the Greenback lower, lifting the Euro toward $1.10. The single currency last gained 0.12%, after earlier touching a session-high of $1.1020. Sterling steadied at $1.27755, while the U.S. Dollar index rose 0.07% to 102.07, having slipped broadly in the wake of the Fitch news.

Data 13.15: ADP Non-Farm Employment Change expected 191k from 497k.