GBPEUR/GBPUSD Following on from last week, the Pound declined almost 1% against the Euro on the week, falling to a low of 1.0996 in London, while the UK currency also fell to a one-month low versus the U.S Dollar, after Moody's Investors Services described the UK as weaker than top rated countries like Germany and France. The Pound fell to a low of $1.6199, as global stocks deteriorated, boosting demand for safe haven assets. The cost of protecting UK debt from default was equivalent to that of Portugal, which is rated Aa2 by Moody's, it's third highest grade. Mark Schofield, head of interest rate strategy at Citigroup Inc, said that "the UK's fundamentals are dismal and don't support the ratings. Only if some pretty draconian fiscal measures are in place will the UK keep hold of its Aaa rating." Moody's said that its top debt ratings on the U.S and the UK may be at risk and "test Aaa boundaries" because their public finances are worsening the wake of the worst financial crisis since the Great Depression. The Pound subsequently declined against all of the 16-most actively traded currencies, and continued the downward momentum after the Chancellor's pre-budget report. The Pound extended its decline against the majors, amid reports that UK manufacturing unexpectedly slowed in October. A report from the Office of National Statistics showed that factor output was unchanged, after gaining 1.5% in September, a sign that the economy is struggling to shake off the effects of the longest recession ever recorded. Production fell 0.9% in the third quarter, revised down from 0.8% in the preliminary estimates. The revision will have a negative impact on gross domestic product, which showed that the UK economy contracted 0.3% in the three months through September, the sixth quarter of contraction, making this the longest recession since records began in 1955. In the pre-budget report, the Chancellor announced a slightly higher budget deficit forecast for the current fiscal year of £178 billion, with very little change expected for next year. Darling also proposed a tax on banking sector bonuses, but little in the way of fresh ideas to curb near-term borrowing levels, as labour market taxes were raised slightly from 2011. There will be inherent fears that no significant action will be taken before the general election, which must be held by June 2010. In an environment dominated by risk sentiment, market confidence in the UK debt situation will deteriorate further and there is certainly a risk that Sterling may decline further against the U.S Dollar, as investors retreat to the security of save haven assets. The UK currency recovered some losses against the Euro on Friday, rising to a high of 1.1120 in London, after the Bank of England voted against additional stimulus measures. Policy makers, led by the governor Mervyn King, kept the benchmark lending rate at a record low of 0.5% and held the asset purchase plan at £200 billion, as officials seek to ensure the economy's recovery from the longest recession on record. Lee Hardman, a foreign exchange strategist at Bank of Tokyo Mitsubishi UFJ Ltd, said that "sterling may depreciate towards $1.50 against the Dollar and 1.0820 versus the Euro over the next six months." Policy makers said in November that the most "natural" time to assess the quantitative easing policy will be in February and the decision last week was widely anticipated. As a result, the Pound remained largely unchanged after the announcement, but the UK currency continued to lose ground against the higher-yielding currencies, including the Australian and New Zealand Dollar. The Pound rallied against the majors after the announcement, trading back towards $1.63 versus the U.S Dollar. The governor Mervyn King, said last month that he has an "open mind" about additional stimulus measures and won't risk withdrawing bond purchases too soon. The BoE have now spent £187 billion of newly created money on bonds, with the bulk of the purchases in gilts. Ian Stannard, a foreign exchange strategist at BNP Paribas SA, said last week that "sterling is putting in a pretty resilient performance. The only thing supporting sterling at the moment is the fact that inflation expectations are holding up. The outlook for sterling over the medium term remains negative." Euro and Dollar buyers may wish to consider taking advantage of the Pound's resilience in the near-to-medium term or place a stop order in the market to protect against a downward move. The Pound recorded its fourth straight weekly decline against the U.S Dollar, amid concerns that the UK's budget deficit will keep expanding, as the government spends more money it doesn't have trying to shore up the economy. Investors are betting that the UK will continue to decline, as the economy trails its counterparts in recovery from the recession. EUR/USD The Dollar advanced to another one-month high against the Euro yesterday, as risk aversion stalked the market, following the report from Moody's that government deficits may force a downgrade in the U.S credit rating. Richard Franulovich, a senior currency strategist at Westpac Banking Corp, said "risk aversion's rippling through, giving the Dollar a boost." The U.S currency rallied 0.5% against the Euro to a high of $1.4724 in New York, the strongest level since November 4th. German industrial production unexpectedly fell for the first time in three months in October, led by a drop in export demand. Output decreased 1.8% from September, when it advanced 3.1% and Germany's recovery from the worst recession in a generation may slow, as a stronger Euro weighs on export demand. According to Andrew Chaveriat, a technical analyst at BNP Paribas SA, the Euro may continue to drop towards its 2008 low against the U.S Dollar, falling below support $1.4625. "Euro-dollar is in position to have completed its March rally. A drop below $1.4625 would confirm a major top is in place that euro-dollar is at the early stages of a long-term, multi-month decline potentially re-testing or breaking the $1.2330 October 2008 cycle low." The Dollar remained largely unchanged against the Euro towards the end of the week, trading at $1.4726 in New York, as U.S jobless claims fell to a nine month low, encouraging demand for higher-yielding assets. U.S stocks rose for a second day, as the average number of unemployment claims over the past month fell to a one-year low and the U.S trade deficit unexpectedly shrank. The gap in trade shrank 7.6% to $32.9 billion, from a revised $35.7 billion in September, as a rebound in global growth combined with a weaker Dollar pushed up exports for the sixth consecutive month. Manufacturing in the U.S expanded in November for a fourth month and factories in China stepped up production to the fastest pace in five years. A technical report from Commerzbank AG shows that the Euro may decline further against the U.S Dollar, should the single currency break through the Fibonacci retracement level from its $1.5144 high. The Euro encountered resistance at the 38.2% retracement level and a break below $1.4625 may see the single currency fall towards the October low at $1.4480. The Dollar is also gaining amid speculation that the currencies of major U.S trading partners, as gains in retail sales and consumer confidence increased speculation that the Fed will raise borrowing costs next year. The Federal Reserve meets this week for the final time this year but no changes are expected in monetary policy.

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