France no Longer Top Notch

Recent economic indicators have demonstrated ongoing infection to core Eurozone nations due to the region’s economic mess. The underlying threat prompted Moody’s to slash France’s top notch credit rating, broadly due to prevalent growth concerns. Against this backdrop, tomorrow’s UK public sector borrowing data has gained significance, as the prospect of the British government failing to meet its deficit targets could spark fears of the UK losing its “AAA” credit rating. Meanwhile, European leaders remained at loggerheads on deciding measures to reduce Greece's growing debt pile, as they try to finalise a deal to unlock Greece’s next aid tranche during a meeting later today.

Pound Sterling – UK Markets

The Pound nudged marginally higher against the Euro in today’s session, as concerns surrounding the French economy escalated over Moody’s lowering its top notch credit rating on France and maintaining its “Negative” outlook. However, the Pound is little changed against the US Dollar. Meanwhile, with no major domestic cues on radar for today’s session, the Eurozone finance ministers’ meeting today looks set to dominate near-term market dynamics. It is expected that finance ministers will offer a tentative agreement for the disbursement of €44 billion in emergency funding to Greece. With France losing its top credit rating, tomorrow’s UK public sector borrowings data will be in focus, given the underlying threat of a downgrade to the country’s credit rating when Moody’s reviews the nation’s debt early next year. Moreover, minutes of the BoE’s last monetary policy meeting scheduled for release tomorrow are expected to offer a clearer picture regarding the central bank’s stance over adopting further monetary stimulus.

US Dollar – US Markets

Investors continue to believe that a resolution to the “fiscal cliff” issue is critical, as its repercussions to the US economy could be grave. Fitch echoed similar concerns by warning that failure to address the issue could send the US economy into a recession. Moreover, the impact of the Fed’s latest stimulus could be futile, as the rating agency indicated that the unemployment rate could spiral above the 10% mark, if the economy has to bear the brunt of the fiscal cliff. The US Dollar nudged lower against the Euro in yesterday’s session, as reports indicated that US policymakers were close to agreeing on a deal to resolve the fiscal cliff issue. However, the Dollar clawed back most of its losses, following Moody’s decision to lower the French credit rating. The recovery in the housing market continues to gain traction, as existing home sales unexpectedly climbed for October with the inventory falling to its lowest level since December 2002, validating the favourable impact of lower mortgage rates. Today’s housing starts and building permits data is expected to provide more colour on this front.

Euro – European Markets

The Euro began today’s session on a weaker footing, after Moody’s slashed France’s prized triple-A credit rating, on account of lack of competitiveness in the labour market and persistent worries surrounding the industrial sector. However, the Euro recouped some of its losses, as reports indicated that the region’s policymakers would come up with a partial agreement for releasing the next aid tranche for Greece and they would go ahead with unlocking the aid at a meeting before the end of November. Meanwhile, prevailing differences are expected to prevent the leaders from formulating a plan for reducing Greece’s debt. The Euro briefly breached the 1.28 mark against the US Dollar in yesterday’s session, as hopes of US policymakers reaching a deal for averting the fiscal cliff spurred risk appetite among market participants. Meanwhile, Eurozone industrial output continued to contract annually, while German producer price inflation eased for October. Apart from the meeting of Euro area finance ministers, traders are expected to keep an eye on Spain’s short term debt auction in today’s session.

Other Currencies – Highlights

The Japanese Yen climbed higher against its major peers, as “risk off” sentiment remained the order of the day after Moody’s stripped France’s top notch credit rating. Meanwhile, along anticipated lines, the Bank of Japan in its monetary policy meeting today held off from administering additional monetary stimulus, after having embraced easing measures in September and October. However, Japan's opposition party, which is widely expected to emerge victorious in next month’s elections, has indicated that it would consider revising a law guaranteeing central bank independence, thereby elevating prospects of further monetary stimulus in the near future. Meanwhile, economic indicators portrayed a grim picture, as the all industry activity index contracted for September, while Japan and Tokyo department sales continued to slide for October. Apart from the finance ministers’ meeting in the Eurozone, traders are expected to keep a watch on Japan’s trade data for further insights.