Euro rattled after Portuguese downgrade

Euro rattled after Portuguese downgrade

The credit rating agency Moody’s has downgraded Portugal’s long term government bond rating to junk- this has heightened fears that eight weeks after their first bailout Portugal may need further help in meeting its debt obligations. This has rattled the euro which was recovering nicely against the USD following the recent Greek fears- it also emphasises that the book does not stop with Greece. The Euro has lost over a cent against the USD and has lost against all but two of 16 major currency peers. The hard line taken by Moody’s in downgrading Portuguese debt by 4 notches sends a message to the markets that the ECB and the EU still have significant work to do and that their methods may not align with the credit rating agencies- a concern for the markets and the euro.

The ECB are expected to raise interest rates tomorrow which will have helped support the Euro even in the light of other issues. The ECB are expected to raise rates by 25 basis points to 1.5% even in the light of slowing economic growth- a policy that is currently the opposite of the UK and the US. However at the moment the euro is on the back foot and any more feedback from ratings agencies could pile on the pressure.

Over to the UK and the pound has managed to claw back some of its losses against the euro- this due to euro weakness as explained above. Against the USD the pound is down- this is due to risk aversion which is USD positive and again due to the Moody’s downgrade of Portuguese debt. Data from the UK showed that UK shop price inflation increased sharply and a survey by KPMG-REC identified a slowdown in fulltime jobs growth. However the pound has been largely unaffected by this data- tomorrow we have the Bank Of England interest rate decision and it is expected that no change will be on the cards.

Report by Phil McHugh