S&P Dampen Euro Recovery Optimism

The euphoria surrounding the outcome of the Merkozy meeting yesterday has taken a backseat after Standard & Poor’s (S&P) put its long-term sovereign ratings on 15 Eurozone nations, including the six AAA rated countries, on review for a possible downgrade. S&P has indicated that it will decide on the ratings based on the result of the crucial European Union summit scheduled for later this week. Contact your dealer if you’re worried that you may be affected by the aftermath of the upcoming summit. Meanwhile at home, worries over the domestic economy flared up again after the latest data showed that like-for-like retail sales dropped on an annual basis, while house prices fell more-than-expected in November. This comes after yesterday’s unexpected improvement in UK service sector activity had helped ease concerns. Eurozone related events and rumors are likely to continue to drive trading sentiment.

Pound Sterling – UK Markets

Sterling is trading lower against the US Dollar after data from the British Retail Consortium (BRC) indicated that annual like-for-like retail sales in the UK fell 1.6% in November, marking the weakest performance since May 2011. Moreover, data from Lloyds Banking Group's Halifax division showed that house prices in the UK declined more-than-expected in November. However, Sterling is trading higher against the Euro, after S&P’s warning of downgrading the credit ratings of 15 Eurozone nations. Yesterday Sterling gained against the US Dollar and the Euro following an unexpected improvement in the UK services Purchasing Managers’ Index for November. We expect the direction of Sterling against the Euro over the next few trading sessions to be determined by the events unfolding in the Eurozone.

US Dollar – US Markets

The US Dollar strengthened against Sterling and the Euro as markets turned risk averse following S&P’slowering of its outlook for the credit rating of several Eurozone nations. Concerns over a possible slowdown in the global economy resurfaced after the Asian Development Bank (ADB) indicated that Emerging East Asia faces "major" downside risks and lowered its 2012 growth outlook for the East. Additionally, an unexpected slowdown in the US service sector activity for November also spurred speculation of a slowdown in the global economy. The Chicago Federal Reserve President, Charles Evans, rekindled hopes of additional stimulus after he stated that further central bank stimulus is “imperative” to help the US economy to escape a “liquidity trap”. With the IBD/TIPP Economic Optimism Index being the only release on tap today, the US Dollar is expected to trade higher against the major currencies and find further direction following updates from the Eurozone.

Euro – European Markets

Risk appetite has taken a hit after S&P announced that it has placed 15 European nations, including the six AAA-rated countries, on watch for potential downgrades, pending the outcome of the European summit later this week. However, losses in the Euro were capped after leaders of Germany and France stated that they “took note” of the move by S&P and that Germany and France were determined to take “all necessary measures” to ensure the stability of the Eurozone. Prior to S&P’s announcement, the German Chancellor, Angela Merkel, and the French President, Nicolas Sarkozy, had urged their European Union partners for a quick and sweeping overhaul of the existing treaties in order to toughen Eurozone’s fiscal rules. Economic releases taking center stage today include the Eurozone Gross Domestic Product, which is anticipated to be unchanged in the third quarter, while October’s German factory order statistics are expected to show slower growth.

Other Currencies – Highlights

The Aussie Dollar declined against the US Dollar after the Reserve Bank of Australia (RBA) cut interest rates by 25 basis points for the second-straight month to 4.25%, marking its first back-to- back easing since February 2009. The central bank’s move was broadly in line with market estimates. RBA Governor, Glenn Stevens, stated that the inflation outlook afforded scope for a modest reduction in the cash rate while adding that declining commodity prices over recent months have taken pressure off inflation. On the economic front, data showed that the seasonally adjusted current account deficit in Australia stood at A$5.64 billion for the September 2011 quarter, marking a 15.4% drop from the June 2011 quarter. Additionally, lower risk appetite, after S&P’s warning on the Eurozone nations, affected trading sentiment towards the Aussie Dollar.