FX mkt in no mood to take risk.
Greece further in the doghouse,
GBP vulnerable ahead of GDP revision.

Bernanke may have delivered no major surprises yesterday but his reassurances that rates will be left on hold for an extended period allowed a little support for equity markets. In contrast the fx market is not in the mood to extend risk. Bernanke's speech yesterday coincided with the release of disappointing US new home sales data which served as a reminder of the continued vulnerability of the market and drove home the point as that there is still no near-term risk of a rate hike. European data this week have also tended to highlight the sluggish nature of its economic recovery. Following the poor IFO survey released earlier in the week, Eurozone Feb economic confidence disappointed this morning as did French consumer confidence. The JPY has been the major beneficiary of economic uncertainty making gains vs the USD, GBP and the EUR overnight before sellers emerged. The USD gained significantly vs the EUR overnight on the fears of further downgrading of Greek debt, though from an low of USD1.3453 EUR/USD has managed a decent bounce in European hours back above the USD1.3500 level.

Moody's is now the only major credit rating company which holds Greece above the level necessary for it to be used as collateral at the ECB under its old collateral rules which are expected to be reverted to this year as part of the ECB's exit policy program. This morning Moody's warned that it may cut Greece's credit rating unless the government provides reassurances that it will not significantly deviate from plans to cut its budget deficit. The Greek government currently plans to reduce its budget deficit to 12.7% of GDP in 2009 to 3% by the end of 2012 and has until mid-March to make further adjustments to its budget to re-assure the EC and the markets that this can be done. However, with strike action suggestive of public opposition to deep fiscal cuts, the market remains sceptical of the ability to manage this. The comment from Moody's this morning and the warning from S&P yesterday that it could downgrade Greek debt by 2 notches has worsened the outlook. While EUR/USD failed to take out the recent low at USD1.3445, the downtrend in EUR/USD remains in place.

Cable broke lower in Asian hours dragged down by the move lower in EUR/USD against the backdrop of weak UK growth and budget concerns. EUR/GBP has pushed back towards the top of its recent trading range. This morning's news of a -5.8% q/q drop in UK Q4 total business investment was a another negative shock for UK markets and will heighten fears that tomorrow's crucial release of the Q4 GDP revision could should the UK economy has as yet failed to drag itself out of recession. A poor number tomorrow could open the gate for another leg lower in the pound particularly vs the USD.

Bernanke's Senate testimony and the later speech by the Fed's Bullard, US durable goods and initial claims data will all be watched today.
Jane Foley
Research Director