Italian debt downgraded by Moody’s

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The latest incarnation of the Greek bailout, which looks very similar to earlier versions, has so far failed to inspire any confidence. What did provide re-assurances to the market and investors yesterday however, was the announcement that the French and Belgian governments will give their full support to Dexia Bank. The 15-year-old bank has already been rescued once, three years ago, but is still heavily laden with debt. The bigger picture is that Dexia passed two EU stress tests in the last two years.

Initial enthusiasm for the rescue of Dexia has since been tempered by Moody's downgrade of Italian sovereign debt by three notches to A2. Not only is the news intrinsically negative for the Euro, it is also a reminder that Belgium could be at risk of a downgrade as a result of taking on the debt of Dexia.

Except against the Euro, where Sterling touched a 7-month high at £/€ 1.17 on yesterday's foreign currency exchange market, Sterling has not done a whole lot in the last 24 hours. It is virtually unchanged against the US Dollar, the Japanese Yen, the Swiss Franc, the Canadian Dollar and the Australian Dollar. The lack of progress for Sterling was due to a weaker-than-expected UK construction purchasing managers' index (PMI) which came in two and a half points lower at 50.1, well short of the 51.7 predicted by analysts and soft enough to keep alive the threat of further quantitative easing by the Bank of England.

The US Dollar's failure to perform came partly from an unexpected -0.2% monthly fall for factory orders, partly as a result of comments by Federal Reserve Chairman Ben Bernanke, who told Congress that the economy was "close to faltering". 

The US Dollar has the chance to redeem itself today if US services sector PMI achieves 52.7 as forecast. At that level it would be well ahead of the opposition; the other predictions are 50.3 for Germany, 49.2 for Euroland and 50.6 for the UK

Making up today's list of data are the finalised figures for UK and Eurozone gross domestic product in the second quarter and ADP's monthly employment change number. The latter is not a fireproof predictor of Friday's official employment report but it does tend to move the FX market when it is adrift from forecast; the number pencilled in for today is an increase of 70-75k.

Sterling will be hoping that the UK economy is still growing, even if it is only by 0.1%-0.2%.