Euro and British Pound Tanks: Big News from Europe

With the US markets closed for Martin Luther King’s Day, the odds were skewed towards a quiet trading. However, big news in Europe has made it anything BUT quiet.

After hitting an intraday high above 1.33, the EUR/USD has sold off aggressively on news that Standard and Poors downgraded the sovereign debt rating of Spain from AAA to AA+. The outlook is stable which means that further downgrades for the country is unlikely. However this could be the beginning of more downgrades in the Eurozone. Last week, Greece’s sovereign debt rating was downgraded as well to A- while Ireland and Portugal have been placed on credit watch. The reasons for the downgrades are obvious. The Eurozone is in recession and those countries have suffered greatly. Also, public finances have deteriorated materially since the governments are trying to spur growth by spending.

British Pound Below 1.45 After New Announcements by UK Government

The British pound has also fallen below 1.45 after the UK Treasury announced more groundbreaking measures to stimulate the UK economy. They have set up a program to guarantee bad debts and buy up to GBP50 billion in private sector assets. They will also be increasing their stake in the Royal Bank of Scotland. This is aimed at pumping more money into the economy and may be a step towards quantitative easing. Although the UK government has been the most aggressive in coming up with measures to turn the economy around, the British pound has sold off because investors fear that the step was taken because the outlook for the UK economy was worst than feared. They are also doubtful that the government’s efforts will pay off.

In the long run, all of the stimulus that the Brown and company have injected should make the UK the first country to recover when the global economy stabilizes. This is why I am long term bearish EUR/GBP.

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