In a somewhat surprising move, Standard & Poor’s has revised the UK’s financial outlook to negative from stable. This creates an unsettling possibility of seeing British debt rating downgraded.  The agency reaffirmed the country’s long term triple A credit rating but said the outlook had deteriorated because of massive borrowing to deal with the recession and the banking crisis. This is the first time Britain has been put on the negative list  since S&P started giving its view of the outlook of the country’s public finances in the early 1980s. S&P is projecting I that the government’s net debt burden will rise to nearly 100 percent of economic output by 2013, way more than the government is currently projecting. 
Lowering outlook doesn’t mean a formal re-evaluation of Britain’s rating but indicates that policy makers have to be aware that a downgrade may happen if public finances do not improve. Of course,  lower credit rating would make the government pay higher interest rates to borrow money on bond markets. Frankly, most of market observers, this one included, expect interest to start rising relatively soon, as ALL governments will be forced into higher borrowing cost, to cover all the bailouts and stimulus  packages.
Personally, I don’t know why anybody should pay attention to rating agencies, after they demonstrated their skills over last few years. This aside, if UK might see its rating lowered because of level of debt, what about Japan? Their current debt is way above of what Britain will reach few years down the road. What rating should Japanese bonds have? DDD? How about US? Current debt level is about 65 percent of GDP. If  projections hold, we are also on pace to reach the 100 % mark within few years. When will S&P lower US outlook? Or is it too sensitive?
This turned out to be big news, as markets responded in a ferocious manner. Of interest to me was Pound, especially because of the trade suggested just yesterday. GBP fell like a rock on the news, 300 pips against USD and JPY. My own trade in EUR-GBP also looked precarious for a while, with market jumping 140 pips. I used larger time frame for the set up, so my tolerance for draw down was considerable, but these kind of situations are always inducing a little of nervousness.

I didn’t have a firm stop, but was watching the 0.8850 area. This is a fairly important level, where price found resistance twice before, points A and B. Also, it moved above 100 SMA. However, this move was induced by news and viewed on smaller time frame, it had making of a panic. I want to see a continuation of this on the next hourly candle. It didn’t happen. Chances were good, that this move was a “whip” and price would reverse. I opened another short position of the same size, this time with a firm stop above the newly formed high. Price collapsed, and closed both trades at 0.8755, or original entry. I expect the price level off here and probably turn up. For now. Longer term charts still point to stronger GBP, but at the moment there is no new sell order under the low. I want for the price to settle down a little.
Canadian dollar looks a little vulnerable now, so I’m placing a buy order in EUR-CAD.

Last week there was a good trade in this pair covered on these pages. I think current situation is promising as well. Plan is to buy on a breakout above 1.5800, with 110 pips objective. 
Pound was certainly the center of attention today. It has already recovered all most of the losses, but as I mentioned before, it is expected to take a break now. In case of EUR-GBP, if we see new low over next 4-5 hours it could be a good BUY for about 70 pips. I will not be taking this trade, but if this situation happens, it will be explained in the next post.

Mike K.