The UK’s credit rating downgrade was overshadowed by events in Italy, as early projections indicate a possible divided parliament.

The UK’s credit rating downgrade was overshadowed by events in Italy, as early projections indicate a possible divided parliament.

At the time of writing, the latest projections showed that the centre-left coalition led by Pier Luigi Bersani had 29.1% of the votes, the centre-right coalition led by Silvio Berlusconi shared 28.6% of the votes and the Five Star Movement, led by Beppe Grillo had 26.3% of the votes. A hung parliament in Italy could jeopardise the austerity measures that Mario Monti had put in place in the previous administration and that had been championed by German Chancellor Angela Merkel. The uncertainty of a clear winner caused the euro to weaken yesterday to a six week low against the US dollar and caused the euro to lose all the gains it made against the pound following Moody’s decision to but the UK’s AAA credit rating.

The uncertainty in Italy also caused demand for other riskier assets to wane yesterday; with both the Canadian and Australian dollar weakening and the US dollar gaining on account of its safe haven status. This morning we have also seen Italian 10 year bond yields rise to 4.82% from 4.37%, as well as seeing the Italian stock market fall by 5%.

With very little economic data due for release for markets to focus on, the outcome of the Italian election will no doubt be the talking point of the day for euro investors. US dollar investors will be focusing on US Federal Reserve Chairman Ben Bernanke’s testimony on monetary policy to the Senate Banking Committee today.

Whilst the downtrend for sterling/euro remains intact given the recent ‘AAA’ downgrade by Moody’s and the persistent negative outlook on the UK economy; the instability in Italy provides euro buyers an opportunity to purchase the single currency at what could be the new peak in the current trading range.

Key Announcements:

10.00am – GBP – Inflation Report Hearings.

10.00am – GBP – MPC Member Bean Speech.

14.00pm – USD – Housing Price Index (Dec): Expected to remain at 0.6%.

15.00pm – USD – Fed’s Bernanke Testifies.

15.00pm – USD – New Home Sales (Jan): Expected to rise to 381,000.