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Forex Flash: GBP/USD in mid to high 1.40's in the coming weeks - Commerzbank

The UK sovereign rating was downgraded for the first time since the 1970's: Moody's took the iniciative on Friday, cutting the rating from AAA rating to AA1. “The reasons for the downgrade are at this stage well known: low growth, moderately high inflation and a large budget deficit”, wrote Commerzbank analyst Peter Kinsella. “To a large extent this will have been priced in by markets, which have expected a downgrade since the Chancellor's autumn statement last year. Nonetheless we can expect further sterling weakness in the short term, the only question is the extent of that weakness”, he added, expecting the GBP/USD to trade towards the mid to high 1.40's in the coming weeks.

In regard to the EUR/GBP, the extent of the upside is questionable as the cross usually finds strong resistance above 0.90. “However the clear shift in policy towards a nominal GDP target (i.e. more inflation) will doubtless prove to be a burden for the pound”, he continued. “The bottom line is that the cyclical and structural drivers for last year's sterling rally have now lost momentum”, Kinsella concluded, expecting things to get worse for the pound before they get better.

European markets rally ahead of Italian elections' results

The German DAX 30 (+0.40%), the French CAC 40 (+1.58%), the Italian FTSE MIB (+2.33%) and the Spanish IBEX 35 (+1.83%) are moving higher on Monday ahead of Italian elections' results. Investors are also preparing for a likely dovish speech in tomorrow's Fed Bernanke's semi-annual testimony.
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Forex Flash: The strange golden age of FX - Societe Generale

Sebastien Galy of Societe Generale note that the combination of a UK downgrade and a uncertain Italian elections are the fuel for a run of stop losses on long GBPUSD and EURUSD.
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