RISK APPETITE SUBDUED AS FOCUS REMAINS ON JAPAN

Euro sentiment was hit overnight on the back of the news from Moody’s that it is downgrading Portugal’s long term government bond ratings, with the USD/EUR rate failing once again to make a sustained break through the $1.40 level. However, the sell-off was not extreme with some seeing the move as little more than catch up with other agencies who have already downgraded. The main issue for markets remains the situation in Japan, with the ongoing uncertainty about the nuclear crisis keeping risk appetite subdued.

The yen was slightly lower against the dollar in early morning trade as investors focused on the disruption to the economy following the earthquake disaster but it remains strong none the less. Meanwhile, the Fed’s policy meeting ended with little change to the markets view on the outlook for US interest rates. As expected it was cautiously optimistic about the economy, saying that the recovery is on a firmer footing, that the labour market is improving gradually and that household and business spending are expanding.

It did sound a note of caution on inflation but at the same time there was no indication that it was moving from its very accommodative policy stance. This is likely to weigh on the dollar versus the euro as markets anticipate a euro zone rate hike at the ECB’s next policy meeting on April 7th. Sterling has recovered from yesterday’s fall to four month lows versus the euro but remains choppy. Some gains were also seen versus the USD overnight. The biggest gains overnight were seen with the GBP/AUD and GBP/NZD as stock market participants found the appetite to make some short term profit taking – this alternatively weighed on AUD and NZD price movement with the market presenting a good opportunity for any buyers this morning.

Looking at the fundamental releases, this morning sees the release of February’s UK unemployment report, which is expected to show a modest rise in the claimant count. Earnings for the three months to January are also due and will be watched for any signs of a build up in wage pressures, though from very subdued levels.

Tom Trevorrow