httpvh://www.youtube.com/watch?v=davStiMHavE

• Pound little changed after Budget fudge
• Portuguese debt downgraded by Fitch, euro weakens
• Downgrade causes dollar strength on safety flows

Those of you received our Special Report on the Budget yesterday will already know the main points behind it. It definitely was more of a party political broadcast than a classic Budget and as such the impact on the pound was fairly minimal.

The growth targets for the next couple of years are still optimistic at 3.5% (average growth is somewhere nearer 2.75%). This difference does mean the difference between needing to expand the deficit or not. Ratings agencies were not impressed by the Budget with S&P commenting that any ‘UK rating action will depend on the next government’s deficit plan’. This was very much a piece defining Darling as a safe pair of hands; shame he wouldn’t get an opportunity to get to use them even if Labour are triumphant in May. There will be a cull of badgers after all.

While ratings agencies are happy to wait until after the general election to action a change in our credit rating they had no qualms in hurting the Portuguese yesterday. Fitch downgraded Portugal’s sovereign debt to AA- from AA and maintained a negative outlook. This was purportedly due to fears over budget deficit levels and the ability to repay in the future (sound familiar?). This of course rocked the euro to a 12 month low against the USD and saw GBPEUR briefly move back into the 1.12s.

With Greece still unresolved traders are still happy to sell euro against most other currencies and a bearish lean will remain over the single currency for a while. The broad consensus of opinion over the prospects for EUR/USD sees it falling to 1.25 in 6 months; a figure that would put GBP/EUR in the 1.19s were GBP/USD to stay at current levels.

Dollar was definitely the winner yesterday as the risk aversion caused by the Portuguese downgrade saw investors move away from risky assets and into havens. Poor data in the US in form of new home sales also helped equity markets lower. Cable has drifted into the low 1.49s ahead of important UK data today.

That data is the latest round of UK retail sales which are expected to bounce back strongly after the snow related pain that we saw in January’s release; this is due at 09.30. Given it is Thursday we have Initial Jobless Claims from the US as per usual with the market looking for a slight improvement in prospects. Ben Bernanke also testifies today; dollar movement is therefore inevitable.