Currency Exchange Rate Forecast:: Pound Sterling Under Pressure

The pound remains under severe pressure in the markets on the back of the announcement late last week by credit ratings agency Moody’s that the UK has lost its Aaa credit rating by one notch to Aa1. This week has bought further bad news for the pound with the testimony on Tuesday to Parliament by senior Bank of England (BoE) policy-maker Paul Tucker who said that he remains open to doing more Quantitative Easing (QE) depending on the outlook for demand and inflation. Yesterday brought the news that Prime Minister David Cameron has pledged to go "further and faster" in reducing the deficit. Cameron insisted that the one notch cut to the debt rating was a reason to press ahead with balancing the public finances, despite claims by the Labour leader, Ed Miliband, that the UK now had a "downgraded government, a downgraded chancellor and a downgraded prime minister".

The euro rose for the first time this week against the US dollar as market nerves were soothed by strong demand for Italy's first bond sale since last weekend’s elections. The Italian Treasury met the top end of its target range at Wednesday’s auction and sold a total of €6.5 billion in public debt. The strong demand came as a bit of a surprise following the political turmoil in the wake of Italy's inconclusive election results. The results show that centre-left coalition leader Pier Luigi Bersani won the lower house by less than a half of a point while former Prime Minister Silvio Berlusconi won a blocking minority in the Senate. Both parties fought the elections on an anti-austerity measures platform.

The first attempts to find a way out of the political deadlock have suffered an early setback after a proposal by the centre-left Democrats to form a minority government was effectively killed off by the leader of the anti-establishment Five Star Movement. Beppe Grillo announced yesterday that his movement would not give a vote of confidence in parliament to a government led by either the centre-left or Silvio Berlusconi’s centre-right party.

Elsewhere in the euro zone, risk appetite was boosted by better than expected German consumer confidence data for March. Figures from GfK showed confidence rose from 5.8 to 5.9. Meanwhile, the euro zone´s economic confidence index for February rose from 89.5 to 91.1.

In the US, seasonally-adjusted pending home sales index rose by 4.5% to 105.9 points in January, its highest level since April 2010 according to a report by the National Association of Realtors (NAR).

Economists were expecting the index to increase by a more moderate 1.5% as the housing market continues to give signs of a sustained recovery. Pending home sales rose in all regions but the biggest rises were in the Northeast where sales rose by 8.2%

The data comes after the US Commerce Department revealed on Tuesday that new home sales jumped by 16% in January to their highest level since July 2008. Data has also shown that US home prices rose by their biggest level in more than six years in 2012.

Speaking to the Senate's Banking Committee yesterday, Federal Reserve Chairman Ben Bernanke noted the recovery in the US housing market.

Bernanke said that "We are still far from where we like to be but the evidence shows that the housing market is strengthening and low interest rates is one of the reasons for that strengthening. The increase in house prices and the increase in economic activity should benefit other industries as well".