The two big movers overnight were the UK Pound, which slid against its key rivals on a warning from ratings agency Fitch that the country faces a ‘formidable’ challenge in bringing its fiscal house in order and the Swiss Franc which continues to gain on the Euro.

First the warning from Fitch,

From Fitch (registration required): “Fitch Ratings says in a new special report that following an unprecedented economic and financial shock, the scale of the United Kingdom’s (UK) (‘AAA’/Stable Outlook) fiscal challenge is formidable and warrants a strong medium term consolidation strategy – including a faster pace of deficit reduction than set out in the April 2010 Budget…

With other European sovereigns strengthening their fiscal consolidation plans and market concerns about sovereign risk in advanced countries increasing, both the size of the UK deficit currently projected for 2011 and the failure to reduce it to 3% of GDP within five years are striking.”

The new government will unveil its emergency budget on June 22nd, and the warning will give credence to PM Cameron’s push to sharply government spending and try and bring down the country’s deficit. Still with markets focused on sovereign debt risk, the Pound slid quickly following the Fitch release.

The GBP/USD pair slid from an overnight high of 1.4527 to a low of 1.4372, with most of the decline coming in about a two hour window. That put the pair back near its lows from yesterday and extends the pressure on the pair that was seen to end last week.

The GBP/JPY and EUR/GBP pared yesterday’s gains in favor of the Pound.

Swiss Franc Extends Gains vs Euro

The EUR/CHF meanwhile broke below its most recent support at the 1.3850 level, sliding down to the 1.3760 level, as it seems the SNB is content to let the Franc appreciate, at least for now. While the problems in Hungary are coming under control following the scare the markets had to end last week, it still exposes a very big problem in that European banks are holding lots of assets on their balance sheets that could hold potentially very big losses. A big part of those holdings are sovereign debt fueled by borrowing cheap money from the ECB.

With concern about the European banking sector back at the forefront, European investors are shifting their funds to Swiss banks, which is increasing the demand for Swiss Francs.Data overnight from Switzerland, including the unemployment rate staying at 4% and consumer prices down 0.1% on the month in May were not the catalyst here. Traders may also be trying to see what is the next level that the Swiss National Bank will protect as the Franc continues to strengthen.

In order to protect the Franc from appreciating, the central bank has had to sell Francs and build up reserves (much different from a currency crisis when a central bank has to run down reserves in order to keep its currency from falling). According to the country’s statistics office, the overall currency reserves rose to 232.4 billion Swiss francs ($200.7 billion) in May from 153.6 billion francs in April. That reflected the massive intervention seen throughout the month, but also reflects that despite all of that, the EUR/CHF pair is below the 1.40 level the bank tried to protect. In other words despite close to $50 billion in intervention, there was no lasting impact.