Concerns over the Eurozone debt crisis continue to weigh heavily on the Euro after a series of downgrades by ratings agencies. Moody's downgraded Hungary to non-investment grade Ba1, from Baa3, with a negative outlook. Yesterday Fitch had downgraded Portugal’s credit rating to junk status, citing “large fiscal imbalances, high indebtedness across all sectors and an adverse macroeconomic outlook.” Consequently, Sterling has shot up against the euro this morning.
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German Chancellor Angela Merkel’s rejection of joint Euro bonds and continued opposition to a bigger role for the European Central Bank (ECB) in managing the debt crisis, have further damped hopes for a potential early solution to the sovereign crisis.
At home, the Bank of England’s (BoE) remains apprehensive about the state of the UK economy, even though the UK GDP rose in the third quarter. The bank also slashed its 2012 growth forecast by more than half, emphasizing the need for more easing in the near future.
Pound Sterling – UK Markets
Sterling has strengthened dramatically against the Euro given the negative Eurozone news. Paradoxically, Sterling continues its downwards descent against the US Dollar amid concerns that the Eurozone crisis would hamper Britain’s growth prospects. BoE board member, Ben Broadbent, has cautioned that the UK faces the risk of a double-dip recession and noted that the margin of slack within the real economy ‘is likely to grow’ as the region copes with a slowing recovery.
The Office for National Statistics maintained that the third quarter GDP growth remained unchanged at 0.5%. However, the components of GDP revealed that service sector output fell short of estimates, while consumer spending remained flat for the quarter, thereby raising questions over the sustainability of the economic recovery. Meanwhile, concerns over UK housing markets prevailed after the CEBR indicated that British house prices will rise 1.6% in 2012, which was lower than their previous estimate of 2.4% growth for the next year.
US Dollar – US Markets
Weak risk appetite among investors has helped the US Dollar to climb against the majors this morning. A ratings downgrade for both Portugal and Hungary highlighted the global economic woes and prompted investors to seek refuge in the currency as a safe asset.
Moreover, the currency has gained in anticipation of an improvement in the US consumer confidence index, scheduled for release next week.
With no major economic releases scheduled today the US Dollar is likely to trade based on cues from the unfolding of events in the Eurozone.
Euro – European Markets
The Euro has plunged against the majors this morning amid heightened contagion risk, as Fitch Ratings lowered Portugal’s sovereign credit rating to BB+ from BBB- with a negative outlook. Furthermore, Angela Merkel reiterated her firm opposition to the issue of joint Euro bonds.
Painting a dismal picture of the region, European Commissioner for Economic and Financial Affairs, Olli Rehn, cautioned that the debt crisis is beginning to take a toll on the ‘core of the Euro area’ following the downbeat bond auction in Germany.
On the economic front data just released indicates a drop in French consumer confidence for November. The currency is expected to take cues from the Italian bill auction scheduled later today. With the fundamental outlook for the Eurozone turning increasingly weak we hold a bearish outlook for the Euro today.
Other Currencies – Highlights
The Japanese Yen is trading lower against its major counterparts after Standard & Poor’s indicated that it might lower the nation’s sovereign rating. The rating agency stated that the Prime Minister Yoshihiko Noda’s administration has not made sufficient progress in tackling the public debt burden, thereby strengthening speculation of weakness in the country’s economy.
Meanwhile, data released earlier today indicated that Consumer Price Index (CPI) in Japan declined for the first time in four months in October. Additionally, the core CPI in Tokyo, which is considered a leading indicator for the national trend, also registered a 0.5% drop in November.
However, the losses in the Yen were limited amid concerns that the policy makers in the Eurozone would fail to reach a solution to tackle the region’s sovereign debt crisis. We expect the Yen to trade lower against the majors today.
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