S&P put the cat among the pigeons yesterday with the news that it has affirmed the US's AAA credit rating but had revised the outlook to negative. The news, however, cannot be described as a complete surprise.

Last week the IMF accused the US government of lacking a 'credible strategy' to stabilise its mounting public debt, which was posing a 'small but significant risk of a new global economic crisis'. Also, the OECD has forecast the 2011 US budget deficit/GDP ratio as the worse in its region with the exception of Ireland.

Last week President Obama pledged to cut $4,000 bln from the US deficit over the next decade or so. In S&P's view, however, more sizeable reductions in medium-term deficits are needed. Without further sufficient action there is now a 1 in 3 chance that the US credit ratings will be cut in the next two years.

The dollar's reaction to the news yesterday was short-lived. Some investors took the view that S&P's wake-up call to US lawmakers was a constructive step. However, the wrangling of US politicians during the past year of so over the budget have likely been a key factor behind S&P's decision. Insofar as the US's credit rating remains at AAA, S&P's announcement yesterday is just a shot across the bows.

Nevertheless it has the potential to contribute to a forceful turn in the outlook for US debt and the USD. The timing of S&P's move is particularly interesting insofar as it comes just ahead of the end of QE2 in June.

The Fed has been vacuuming up supply through its QE policy suggesting that the Treasury market will be highly exposed to any decay in demand for US treasuries during the second half of the year. The combination of fiscal tensions and a relatively easy monetary policy is likely to keep the dollar index on course for a move towards 70.00 and potentially lower.

EUR - same old demons

The EUR continues to face its own set of demons - specifically fears that Greece could be forced to restructure its debt as soon as this summer. Official denials from Greece are not being particularly effective, after all this time last year Greece was denying that it needed a bailout. The real risk of a Greek restructuring is that it could open a can of worms and lead to similar moves in other peripheral countries.

In turn this could highlight weaknesses in banks' balances sheets which would have the potential to spark a new wave of concerns about banking sector health. Layered on top of these concerns are fears that the Real Finn Party could prevent Portugal receiving its bail-out after Finnish voters gave the party 19% of the vote at the weekend's general election.

These fears have been watered down by the reassurances of other senior Finnish officials, but Eurozone politicians will have to work hard to convince the market that neither Portugal's bailout nor the development of the EFSF will be hampered by this news. Support at 1.4188.

JPY - firmer footing

Since the start of the year there has been a strong correlation between USD/JPY and the DJIA. Simply put while Japanese fundamental may argue for a softer yen, this outlook only has gravitas in a 'risk on' environment. Near-term, the JPY looks set to see decent support. Below USD/JPY84.45 may see towards 83.90.

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