Forex Investment and Currency Trading

Sterling experienced significant depreciation during the European morning as it was weighed on by the weak GDP data and a Moody’s report, which referred to the nation’s finances as “deteriorating rapidly”, released on Thursday. The deterioration in public finances does indeed create at least two risks for sterling. First, the recent bear steepening in the gilt market could prompt the BoE to expand further its QE program. Second, speculation over the outlook for the UK’s sovereign debt rating could affect portfolio capital flow demand for sterling. However, some believe both these risks are manageable. The first risk is somewhat mitigated by recent signs of stabilization in leading indicator data. While it would resurface quickly if financial or economic conditions were to deteriorate further, in such an environment markets would also likely price in a higher probability of further easing measures from the ECB. In terms of the second risk, it should be noted that the UK government is borrowing more in aggregate at the same time as the UK economy overall borrows less from abroad. The rate at which the UK adds fresh liabilities to foreigners is the current account deficit, which has halved over the last 18 months, reducing the need for foreign capital inflows. In this context, some analysts remain a negative outlook for EUR-GBP. The better than expected reading of the German IFO survey has provided EUR with some boost, but the continued decline in interest rate differentials (with the key two-year swap spread having declined 13bp over the last two weeks) suggests that the market continues to expect looser monetary policy in the Eurozone and as such the slight improvement in European data is unlikely to provide EUR-USD with a lasting boost.