All eyes on Brussels

Worries surrounding the Eurozone debt crisis have failed to abate after Fitch cut its credit rating of five Eurozone nations, including Italy and Spain. This unprecedented move by Fitch has shifted focus on Italian debt auctions due later today. The timing of the rating cut has spooked markets as it comes on the back of Greek debt-swap talks and ahead of another round of EU summit starting today. At home, there is little in terms of scheduled economic releases to impact Sterling’s movement today, which is expected to broadly track the headlines emerging from Europe.

Pound Sterling – UK Markets

The Pound has slipped below the 1.5700 mark against the US Dollar this morning as the latest survey by Hometrack revealed that house prices in the UK remained unchanged for January. House prices have now failed to show any increase since June 2010. The agency further cautioned that “downward pressure” on prices will continue amid constrained demand. However, Sterling Euro pair has managed to eke out marginal gains and is hovering close to the 1.1900 level, amid uncertainty surrounding the Greek debt talks and ahead of the crucial EU summit beginning today. Traders are exercising caution ahead of key UK economic data due this week which is expected to provide insights into the current state of the economy. Data due tomorrow is expected to reveal an improvement in mortgage approvals for December, while the manufacturing PMI is expected to post an increase for January. However, service sector is expected to cool down slightly after posting a five-month high reading for December.

US Dollar – US Markets

The US Dollar has regained some of the lost ground this morning on “risk off” trading sentiment prevailing in the markets ahead of the EU summit today. On Friday, data indicated that US growth trailed market estimates. Aggravating concerns further, the New York Fed President, William C. Dudley, warned of a slowdown in the US economy, with risks “skewed to the downside”. Markets are keeping a close eye on the economic releases due today which are expected to indicate that US personal consumption expenditure remained flat while personal income registered an uptick for December. Key set of economic releases due later this week are expected to help the market gauge the possibility of an additional round of QE in the near future.

Euro – European Markets

The Euro is trending lower against the majors this morning ahead of a crucial EU summit later today wherein members are expected to endorse the "fiscal compact”. Yet another round of downgrade for Eurozone nations, this time by Fitch, highlights that there is more pain in the region’s periphery. The agency on Friday lowered credit ratings of Belgium, Cyprus, Italy, Slovenia and Spain, while it affirmed Ireland's rating. On the economic front, German consumer price inflation and Eurozone consumer confidence data are the major releases on tap today. We expect the Euro to remain under pressure with increased focus on the outcome of the summit and Italy’s first bond auctions after being tagged as “especially vulnerable” by Fitch.

Other Currencies – Highlights

The Kiwi Dollar has weakened against the US Dollar following the release of weak services sector data earlier in the day. Data indicated that Performance Services Index in New Zealand fell to a reading of 50.6 for December compared to a reading of 56.2 posted for the November. However, building permits report due later today is expected to show a rebound for December. Additionally, subdued risk appetite ahead of the EU summit today has prompted traders to reduce their bets on high yield currencies. In a significant announcement, the Reserve Bank of New Zealand has indicated that Governor, Alan Bollard, will not seek another five years when his term ends on 25 September 2012.