British Pound Weakens as Fitch Ratings Calls U.K. Fiscal Challenge “Formidable”

The U.S. Dollar is trading mixed against the majorcurrencies ahead of the U.S.opening. The Greenback is posting gains versus the British Pound and JapaneseYen while showing a slight loss versus the Euro and an even bigger declineagainst the risk-related currencies.

The U.S. Dollar is trading mixed against the majorcurrencies ahead of the U.S.opening. The Greenback is posting gains versus the British Pound and JapaneseYen while showing a slight loss versus the Euro and an even bigger declineagainst the risk-related currencies.

Higher global equity prices combined with oversoldconditions are contributing to greater appetite for risk. This is helping todrive up the Australian, New Zealand and Canadian Dollars whilepressuring the lower-yielding Japanese Yen.

Chairman Bernanke’s comments helped underpin the Euro for ashort period of time overnight. On Monday, Bernanke said that Europeis committed to the Euro’s survival and has the funds available to help out anynation that seeks financial aid. Bernanke also said the recent Eurostabilization package was “a lot of money” but enough to protect Greece, Portugaland Spainfrom default for a number of years.

Bernanke did acknowledge, however, that hedge funds andlarge institutions may not yet be convinced that Europe’sdebt problems can be solved and that even more money may be necessary to shoreup the continent’s debt problems. Based on renewed selling pressure in front ofthe New Yorksession, it appears that the Fed Chairman’s comments were only strong enough totrigger a knee-jerk reaction in the markets.

The British Pound is the big loser overnight, pressured bycomments from Fitch Ratings. To summarize, Fitch said that the U.K. is facinga fiscal challenge and needs to accelerate plans to reduce its budge deficit.

According to Fitch analysts, “The scale of the U.K.’s fiscalchallenge is formidable and warrants a strong medium-term consolidationstrategy, including a faster pace of deficit reduction than set out in theApril 2010 budget.”

The analysts further added that the U.K. needs a “strong and credible medium-termadjustment plan to underpin the U.K.’sAAA credit rating, particularly as investor concerns about sovereign risk inadvanced economies have risen.”

Fitch’s comments regarding the debt situation in the U.K. werenothing new. For several months the European Union has been trying to get itsdebt-laden members to take austere financial measures in order to combat theirgrowing sovereign debt issues.

What Fitch wants the U.K. to do is speed up the processof enacting its austerity measures. In other words, move them from long-termplans to the medium-term. If the U.K. doesn’t act quickly, it riskslosing its AAA credit rating. This is something the British government doesn’twant to see happen because it will mean higher financing costs. Fitch alsowants to quell investor fears that the debt problems in continental Europe willjump to the U.K.shores.

Traders reacted to the comments from Fitch by selling theBritish Pound. The daily chart is indicating a weakening condition because ofthe market’s inability to establish support at the short-term retracement zoneat 1.4499 to 1.4435.

Steady global equity markets overnight are helping tosupport the USD JPY but not enough to drive it away from the key 50%retracement level at 91.61. The market movement around this price will dictatethe direction of the trade today. Holding above this level will indicateincreased risk sentiment. Falling back below this price will mean traders areor getting ready to shed risky assets.

Increased demand for higher risk assets are also helping tounderpin the AUD USD and NZD USD while pressuring the USD CAD. Oversoldconditions and short-covering in front of the recent bottoms in the Australianand New Zealand Dollars are helping to push these markets higher. Like theJapanese Yen, the intra-day direction of these two currency pairs will bedictated by the direction of the U.S. equity markets today. Strongerstock markets are likely to push the Dollar/CAD into a retracement zone at1.0481 to 1.0394.

Traders will be watching the pace of any fresh declines inthe Euro today. Some strong bears consider this market oversold and may try totrap weaker traders into thinking a break to new lows will trigger anacceleration to the downside. We’ve seen this move before, but traders stillhave to be reminded of it.

There also seems to be a slight demand for risk thismorning, investors are still a little nervous and may overreact to the downsidein the Aussie, Kiwi and Loonie should U.S. equity markets begin tosell-off.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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