RTTNews - During early deals on Thursday, the pound plummeted to multi-day lows against the currencies of Switzerland, Japan and Europe after ratings agency Standard & Poor's revised the outlook on the U.K. to negative from stable.
The rating agency affirmed 'AAA' long-term and 'A-1+' short-term sovereign credit ratings.
Standard & Poor's credit analyst David Beers said, We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP and remain near that level in the medium term. On April 22, the Chancellor of the Exchequer Alistair Darling said that government's budget deficit this year will reach 175 billion pounds ($273 billion), or 12.4 percent of gross domestic product.
According to S&P, the projections reflect more cautious view of how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and accordingly the pace at which historically high fiscal deficits are likely to narrow. Rating outlooks assess the potential direction of a rating, typically over a period of up to two years.
Following the report, pound fell from new multi-month highs against the dollar, euro and the franc and a new multi-day high against the yen.
The UK stocks also fell for a second day following the outlook report. The FTSE 100 Index dropped 94.67, or 2.1 percent, to 4,373.74 at 10:29 a.m. in London, as all but three of 102 companies on the gauge declined. The FTSE All-Share Index fell 2.2 percent to 2,229.64.
Traders paid little attention to the UK retail sales report, which showed that the sales rose more than expected in the month of March. The Office for National Statistics said retail sales in the U.K. rose 0.9% in April from the previous month, larger than the expected increase of 0.5%. On a yearly basis, sales grew 2.6%, while economists were looking for a 2.4% rise.
Meanwhile, the Bank of England revealed in a report that the M4 money supply grew 17.4% year-over-year in April, slower than the 18.2% increase in March. On a monthly basis, the M4 money supply rose 0.1% in April, after rising 0.3% in the previous month.
The pound plunged sharply against the US dollar by 4:20 am ET and within thirty five minutes, the pair moved from a new multi-month high of 1.5806 to 1.5518. The pair may likely target the 1.529 level, if it weakens further. The pound-dollar pair closed yesterday's deals at 1.5756.
The dollar ticked up during today's early European deals, recovering the losses it incurred yesterday as the Federal Reserve cuts its U.S. economic growth forecasts and leaving the door open to increasing its asset purchase programme. The minutes revealed that while Fed governors foresaw a deeper recession than initially projected, they were also cautiously optimistic that the severely battered economy was beginning to stabilize.
In addition, Fisher warned that unemployment will likely exceed 10 percent before reversing course. At its March meeting the FOMC had taken the drastic measure of deciding to purchase up to $300 billion in longer-term treasury securities. At the April meeting they clarified that the purchase will be made by autumn.
In addition, the Fed reiterated its plans to purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year.
The UK currency slumped to a 2-day low of 1.7085 against the Swiss franc by about 4:50 am ET Thursday, after rising to a new multi-month high of 1.7391 by 4:05 am ET. At yesterday's New York session close, the pair was quoted at 1.7335. If the UK currency slides further, the next likely target level is seen around 1.679.
The pound strengthened in Thursday's Asian dealings versus the Japanese yen, but gave back the gains in early European deals. The pound thus fell from a 10-day high of 149.99 to a 3-day low of 146.90 by am ET. This may be compared to yesterday's New York session closing value of 149.53. If the UK currency ticks down further, 143.1 is seen as the next likely target level.
On the economic front, the Ministry of Economy, Trade and Industry said today that an index measuring tertiary industrial activity in Japan fell a seasonally adjusted 4.0 percent in March compared to the previous month, posting a score of 100.8.
That was sharply lower than analyst expectations that had called for a 1.5 percent monthly decline following the revised 1.3 percent monthly easing in February.
Looking ahead, the U.S. Labor Department report on the number of individuals claiming unemployment benefits during the week ended May 16th is scheduled to be released at 8:30 am ET today. Economists expected claims to increase to 610,000 from the originally reported figure of 601,000 for the previous week.
At 10:00 am ET, the results of the Philadelphia Federal Reserve's manufacturing survey are due. Economists expect the diffusion index of current activity to show a reading of -18 for May. At the same time, the Conference Board is scheduled to release a report on the U.S. leading index for April. The consensus estimate calls for a 0.6% increase in the leading indicators index for the month.
The pound fell sharply against the European currency, declining to a 3-day low of 0.8861 by about 4:40 am ET Thursday. On the downside, the next likely target level for the UK currency is seen around the 0.889 level. At yesterday's New York session close, the euro-pound pair was quoted at 0.8750.
The UK minutes of May 6 and &7 meeting that was made public yesterday revealed that the Bank of England unanimously decided to hold the key interest rate at a record low of 0.5% and to increase the size of the asset purchase programme in early May. The minutes revealed that all the nine members of the MPC stood united while deciding to raise the asset purchase plan by GBP 50 billion to a total of GBP 125 billion. The central bank should seek to complete the GBP 125 billion of purchases within the next three months, the members concurred.
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