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While it was Murdoch and tales of hacking and blagging that grabbed the headlines yesterday it was Fed Chairman Ben Bernanke and the ratings agency Moody’s who were making larger waves.

Bernanke started his semi-annual testimony to Congress yesterday in which he reiterated a statement that had been used in the minutes of the previous Fed meeting i.e. that another round of quantitative easing was possible given the weakness of the US economy. This caused the dollar to start to sell off in the afternoon session after it enjoyed a strong morning courtesy of traders looking for a haven in some risky markets. The prospect of further QE weakened the dollar, gave equities and injection higher and pushed bonds lower as traders bet on a further throughput of cash to businesses.

This good will was shot however by Moody’s who followed up on their promise made in June that they would downgrade the outlook for the US economy to negative if significant measures were not taken to deal with looming debt celing expiry. They argued that they had taken their decision “given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations”. They also stated that even if the ceiling is raised it must come alongside a deficit reduction plan to sort out the massive pile of Uncle Sam’s debt. American GSE’s such as Fannie and Freddie Mac alongside Federal Home Loan Banks were also put on review for a downgrade.

Later in the day it also emerged, just to pour gasoline on the flames, that President Obama had stormed out of a meeting with Congressional Republicans on the debt ceiling, showing just how far apart the parties are. Our hope and expectation is that this “shot across the bows” from the ratings agency will galvanise those in Washington into getting something done before the August 2^nd headline. These 2 factors have made sure that risky assets are slumping this morning although the dollar is also weak with cable above 1.61 and EURUSD back towards the 1.42 level.

Today is also an important day for Italy as we get the results of their latest bond auction. This is of course after a week of fears over the fiscal position of the country causing its bond yields to surge by more than 14% in the past 7 days. We also expect to hear from the Italian government tomorrow with plans on further austerity measures for the country. They need it; as although they are not a high-debt nation compared to Greece or Spain, they are due to roll over EUR1bn of debt soon and this cannot be done at the rates that the market is demanding at the moment. It would be suicide.

Today’s data and event calendars are unlikely to quash any of this recent volatility and so we would recommend speaking to your dealer should you have any questions about the levels or hedging away future exposures. We have Eurozone CPI at 10am that is expected to moderate at around 2.7% while US retail sales (13.30) are set to show another fall off in consumer spending. We also begin US earnings season for the second quarter today with announcements from JP Morgan and Google and there is that pesky Italian bond auction as well.

Latest exchange rates at time of writing