UK’s Elite Status at Risk

The UK appears to be next in line to lose its cherished top-notch credit rating, as the S&P joined Moody's and Fitch in placing the UK rating on a “Negative” outlook, reinforcing apprehensions following the Chancellor’s decision to loosen his austerity stance. Meanwhile, UK policymakers maintained their dovish tone, heightening anxiety ahead of next week’s BoE minutes and fuelling speculation that a change in the BoE’s monetary stance remains on the cards. Upbeat Chinese manufacturing PMI, US jobless claims and recent EU measures to tackle the debt crisis have provided confidence that the global economy is moving in the right direction. However, today’s data indicating deterioration in manufacturing activity across Europe has dampened market spirit somewhat.

Pound Sterling – UK Markets

The Pound nudged lower against the US Dollar and the Euro in yesterday’s session after S&P lowered its outlook on the UK’s credit rating to “Negative” from “Stable” and added that there is a one in three chance of downgrading the UK’s credit rating in the next two years. However, Sterling has managed some recovery against the greenback today following positive Chinese PMI data. Yesterday’s action by S&P has validated the growing belief that the UK could lose its prestigious “AAA” rating, following the government’s decision to steer away from the earlier formulated austerity plans. In the midst of looming uncertainty over the BoE’s stance and ahead of minutes of the latest monetary policy meeting due next week MPC member, Paul Fisher, opined that the central bank may pursue further asset purchases once inflation shows signs of easing, while policymaker Martin Weale indicated that tight credit conditions might be hurting the UK economy. Meanwhile, recovery in the manufacturing sector appears to be gathering steam, as data from the CBI yesterday showed a sharp improvement in industrial orders for December. With a light economic calendar today retail sales, inflation and final GDP figures from the UK next week will be of keen market interest.

US Dollar – US Markets

In the build up to the holiday season, worries surrounding the global economy eased following measures taken by the EU to tackle the region’s debt crisis and encouraging Chinese manufacturing activity data, sending the US Dollar marginally lower against its major peers this morning. However, disappointing manufacturing PMIs across Europe have limited further losses in the greenback. Meanwhile, economic data from the US yesterday was a mixed bag. Data showed that the recovery in the US labour market continues to gather pace and remains the bright spot amid the fiscal cliff gloom, as the number of Americans claiming unemployment benefits declined for the fourth consecutive week. However, the recent deterioration in US consumer sentiment was visible in the domestic retail sales, which grew less than expected for November. In today’s session, traders will be keenly monitoring consumer price inflation data, following the Fed’s decision to adhere to strict inflation targets. Traders are also expected to closely monitor industrial production data for November, given the weakness seen in the previous month. Additionally, any news flow from the “fiscal cliff” negotiations could sway market sentiment.

Euro – European Markets

Initial signs of strength in the common currency, following a positive Chinese manufacturing reading, soon disappeared after manufacturing PMI releases from major European economies showed no major signs of recovery. However, the services sector stayed largely immune to the prevalent crisis in the Eurozone, as data showed an improvement in services PMI across Europe for December. Meanwhile, news flow from the European council meeting continued to be positive after Eurozone leaders approved the next aid tranche to Greece. This came on the back of a resolution to give the ECB powers to supervise the region’s major banks. Yesterday’s session also witnessed Spain successfully auctioning its long-term bond, despite recent political events sending some jitters across bond markets. Apart from important economic releases from the US later today, traders will also keep an eye on Eurozone inflation figures, given the growing rumours of an interest rate cut by the ECB early next year.

Other Currencies – Highlights

The weakness in the Japanese Yen has shown no signs of abating this morning, amid reports that Japan’s Liberal Democratic Party is set for a landslide victory during the weekend, spurring speculation that Japan may undertake further aggressive monetary easing measures. Additionally, economic conditions in Japan remain grim as the central bank’s latest figures revealed that the large manufacturers' business sentiment index slipped to its lowest level since March 2010. Additionally, data confirmed that Japan’s industrial production continued to slide at a sharp pace for October. Although the build up to Japan’s election will remain the focal point for the Yen, traders are also expected to keep an eye on developments in the US and the Eurozone for further direction.