The major thorn in the side of risk appetite towards the end of last year was the mounting speculation of sovereign debt crises stemming from credit ratings downgrades in Ireland, Greece and Dubai. With time, and the absence of any further negative developments into the holiday season, it appeared that most of these concerns had been absorbed by the markets and largely pushed to the sidelines. However it appears that the demons of 2009 have reappeared early in 2010; as an article in the UK's Telegraph newspaper has ignited concerns that the UK too may be about to join the ranks of the aforementioned infamous sovereigns. According to the news item, Pimco - the world's largest bond house - has declared that it is starting to sell off its holdings of gilts; at a time when the UK Treasury attempts to raise unprecedented sums through the capital markets.  With major ratings agencies already threatening to downgrade the UK's credit rating unless there are signs of a more ambitious reduction in the budget deficit, it does not take a huge stretch of imagination to see that the UK position is far from secured. The negative sentiment has put the GBP under considerable selling pressure in the FX markets with GBPUSD testing the lower bound of its range at 1.6050, and EURGBP rallying to just below 0.9000 major psychological resistance. As such, it will be important to monitor whether we see a closing break through these near-term technical levels, and therefore whether further GBP weakness is likely ahead of the BoE meeting on Thursday. At the upcoming meeting, the MPC are widely expected to keep rates on hold and not offer any extension to the QE programme; if however it is deemed necessary for the voting members to inject further stimulus into the UK economy there will be significant scope for further GBP downside.
Forex-Chart