Mass Downgrade Stuns Eurozone

Europe received an unwelcomed weekend surprise after S&P stripped France of its coveted “AAA” credit rating late on Friday, while also downgrading eight other Eurozone nations. Markets await the results of French bill auctions today,worth €8.7 billion, to gauge the impact of S&P’s ratings cut. At home, the housing market continues to face a challenging scenario with Righmove’s house price index indicating a decline for January. With US markets closed today and a light economic calendar globally, trading sentiment will be driven by news bytes from the Eurozone.

Pound Sterling – UK Markets

The Pound surged over the landmark 1.2100 level against the Euro on Friday, after S&P’s mass credit ratings downgrades prompted traders to shun the Euro. Sterling has since slipped back to a little under those levels. Meanwhile, in a turbulent session’s trading with the Dollar, the Pound has lost some ground on its US counterpart after data released by Rightmove, indicated that UK house prices continued to decline for January. The agency further cautioned that the British property market would remain “challenging” this year. Highlighting the bleak outlook for the British economy, the Centre for Economics and Business Research predicts that the BoE is likely keep its benchmark interest rate on hold until 2016. Meanwhile, the UK has a number of important economic releases lined up during the week, which may prove decisive for the Pound. The key inflation number, due for release tomorrow, is expected to indicate a decline for December while retail sales data, slated for Friday, is expected to indicate a recovery.

US Dollar – US Markets

The US Dollar made significant gains following S&P’s downgrading of several Eurozone nations last Friday. This morning it is trading fairly evenly against most of the majors. Market speculation over further easing has dampened after data released indicated that the Thomson Reuters/University of Michigan consumer sentiment index for January, climbed to its highest level in eight months. Despite the recent surge in US consumer morale, the National Retail Federation has indicated that US retail sales growth may witness a slowdown in 2012. With no major economic releases slated for today the US Dollar is expected to find direction from upcoming French bond auctions.

Euro – European Markets

The Euro has opened the week’s trading on the back foot against the major currencies after looming threats over the imminent downgrade of nine Eurozone countries came to fruition on Friday. This has fuelled speculation of a potential ratings downgrade for the EFSF. Additionally, there are persistent fears that Greece will fail to meet Troika’s requirements for receiving their next aid payment. In a move to calm jitters, German Chancellor, Angela Merkel, has called for quicker implementation of the fiscal pact agreed at the EU summit in December. Following Friday’s S&P downgrades, all eyes are set on today’s French bill auctions, which should provide an insight into market risk appetite. Elsewhere, data released this morning revealed that German wholesale price inflation eased for December.

Other Currencies – Highlights

The Yen is trading on a stronger footing against the US Dollar after data indicated that Japanese core machinery orders grew more-than-expected for November, while consumer confidence rebounded for December. However, the Yen is currently trading lower against the commodity currencies, the Australian Dollar and the Canadian Dollar. Meanwhile, the Japanese Prime Minister, Yoshihiko Noda, re-iterated his view that containing the nation’s public debt was critical. Echoing his stance, the Finance Minister, Jun Azumi, indicated that Japan should view the Eurozone crisis as a problem that it may face in the long term if it fails to implement fiscal reforms.