London Session

Aggressive selling pressure hit sterling hard this morning following news from S&P.
USD bears applied the brakes at the EUR/USD1.3800 level following yesterday's sharp move higher. The negative tone in stock markets reflects the fact that the market is still smarting over the gloomy economic forecasts contained within last night's FOMC minutes.

Having sailed through the 200 day moving average, cable buyers were lining up for another bullish session. Optimism was crushed, however, by the announcement from S&P that it had revised its UK debt rating outlook to negative from stable. The outlook has deteriorated because of the massive government borrowing needed to deal with the recession and the financial crisis. The news from S&P coincided with the release of the PSNCR data. At GBP 5.2 bln for May this was far higher than market estimates.
Net borrowing registered a worse than expected GBP 8.5 bln. This news coincides with this week's warning from the IMF that the UK government needs to act faster to bring public finances under control and with a report from PwC suggesting that gov't forecasts that the public finances will stabilise in a decade are optimistic because of the ageing demographic profile. The news on the public finances far outweighed the fact that the ONS reported a better than expected 0.9% m/m rise in April retail sales, though sterling has now recouped almost half of its post release losses vs both the USD and the EUR.

Cautious words on the outlook for the banking section from former Fed Chairman Greenspan has added to the nervousness about the value of the 'risk' trade this morning.
Concerns over the length of the recession had already been raised by the minutes of the FOMC which contained a lowering of forecasts for US growth. Concerns over risk halted the rise of EUR/USD ahead of the 1.3800 level and, as USD selling ran out of steam, gold also gave back some of its gains. Coincident with the cautious tone and the topping out of gold prices, AUD/USD also retrenched. The JPY traded slightly higher vs both the USD and the EUR, though gains are presently being given back.

Upcoming Economic Data Releases (US Session). Prior, Expected