Doubts over UK credit ratings knocks Sterling lower against the Euro

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The credit ratings agency Moody's dealt Sterling a blow yesterday in statement that read "slower growth combined with weaker-than-expected fiscal consolidation could cause the UK's debt metrics to deteriorate to a point that would be inconsistent with AAA rating".

Yesterday's statement was identical to a statement released by Moody's in March and had exactly the same reaction on the foreign currency exchange market as investors sold Sterling, sending it two cents lower against the Euro. Sterling managed to recover by lunchtime as Moody's tried to avoid any blame for the fall, saying the ratings outlook for the UK remained stable.

The credit ratings story seemed to overshadow Eurozone data releases yesterday; the revised first quarter GDP growth figures were unchanged at 0.8% while German industrial production fell by -0.6%, instead of rising by the expected 0.2%. This fall saw annual growth down from 11.2% to 9.6%.

In the US, the Federal Reserve's Beige Book survey of regional activity offered no new insights into the US economy. In some form, all 12 Federal Reserve districts saw some sign of growth although, four of the twelve did report specific problems relating to weather or to breaks in the auto-manufacturers' supply chain.

Overnight, the New Zealand Dollar jumped higher after the Reserve Bank of New Zealand left interest rates unchanged at 2.5% however, it was the statement that made the difference. The RBNZ foresees "a gradual increase of interest rates over the next two years"; the comment adding two cents to the value of the New Zealand Dollar against Sterling.

Australian employment data had an impact on the Australian Dollar, but it wasn't the actual unemployment rate that was the catalyst. The unemployment rate was uncontroversial, steady at 4.9%, but the 7,800 rise in employment was the problem as the number was expected to be three times higher. In April and May together Australia suffered a net loss of more than 20k jobs. In the last two days, Sterling has bounced 2.2% against the Australian Dollar from £/AUD 1.52 to £/AUD 1.5550.

Today, the Bank of England and the European Central Bank are both expected to leave interest rates unchanged at 0.5% and 1.25% respectively. It is unlikely the Bank of England will have anything to add other than the statement it has been knocking out for nearly a year. There will be more focus on the ECB press conference to see the attitude towards inflation is one of "strong vigilance", "vigilance"" or simply "close monitoring". Strong vigilance means there will be a rate increase in July; close monitoring means there won't; vigilance means probably.