Moody’s Fires the Bullet

Moody’s delivered a severe blow late Friday by stripping the UK of its prized top notch credit rating, leading to a much expected downside reaction in against the majors. Although the Chancellor reiterated his commitment to stick to the proposed fiscal consolidation programme, the dire state of the UK economy could prompt policymakers to exert pressure on the Chancellor to alter his stance in the upcoming budget. In a closely fought contest, traders remain cautious today given the uncertainty over whether Italian elections will produce a stable government. Meanwhile, with calls for an early withdrawal of the current monetary stimulus in the US getting louder, tomorrow’s testimony from the Fed Chairman will be closely watched.

Pound Sterling – UK Markets

The dreaded rating downgrade became a reality after Moody’s downgraded the UK sovereign credit rating by one notch to “Aa1” and changed the outlook on the nation’s debt from “Stable” to “Negative”, citing weakness in economic growth and challenges to the government’s debt reduction programme. Moody’s downgrade is yet another blow to the faltering economy, thereby leading the Pound to begin the weekly session on a weaker footing against the Euro and the US Dollar. It remains to be seen whether other major credit rating agencies follow suit in the near term. Despite facing criticism from all quarters the UK Chancellor, George Osborne, expressed his commitment to sticking to the austerity drive in order to reduce the nations’ deficit levels. On the macro front, data just out from the BBA has shown a marginal decline in housing mortgage approvals for January. In this context, a slew of releases from the housing sector due later in the week will be closely watched to gain a clearer picture of future trends.

US Dollar – US Markets

The US Dollar has lost some ground against the common currency in today’s trading session as investors keenly await the outcome of Italian elections later today. On the flip side, the Dollar has nudged higher against Sterling after Moody’s axed its sovereign rating on the UK. With the 1st March 2013 deadline nearing, this week promises to provide loads of action on the political front as sequestration talks are likely to assume centre stage, which comprises spending cuts amounting to $85 billion in 2013. With both sides remaining at loggerheads over the spending issue, it remains to be seen whether US lawmakers will once again be able reach a deal to delay the crisis. Moreover, in the midst of ongoing debate over QE3 destabilising financial markets the Fed Chairman, Ben Bernanke’s two-day testimony to Congress beginning tomorrow will be closely followed for more clarity on the future course of the Fed’s monetary policy. With the recent Empire State and Philly Fed manufacturing indices offering contradictory signals, today’s Dallas and Chicago activity data is expected to remain on traders’ radar. Additionally, a slew of regional manufacturing activity releases due later in the week will be closely followed ahead of the ISM manufacturing data due this Friday.

Euro – European Markets

The common currency failed to garner traction against the US Dollar in Friday’s trading session, as market sentiment was subdued following weaker than expected repayment of the second LTRO by European banks. Despite the growing belief that the European economy is poised to continue on a path of recovery, the EU Commission’s economic forecasts released on Friday painted a rather grim picture of the economy. The agency estimated that the Eurozone economy could likely slip into contraction for a second consecutive year and France and Spain could likely miss their fiscal targets. The rather murkier state of affairs in the region poured cold water on upbeat German sentiment indices data. In the absence of major economic releases today, most market focus is expected to revolve around the exit polls in Italy scheduled to start later this evening. With the region’s politics generating some market interest recently, it remains to be seen whether the possibility of a hung government can be avoided.

Other Currencies – Highlights

The Japanese Yen has continued the downward trend against the US Dollar and the Euro in today’s trading session amid reports that Tokyo plans to nominate Asian Development Bank President, Haruhiko Kuroda, a vocal advocate of aggressive monetary policy, as the next BoJ Governor. The appointment of Haruhiko Kuroda would be in line with the Japanese Prime Minister’s strategy of beating deflation with an ultra loose monetary policy stance. Apart from the transition in leadership at the BoJ, market participants await a flurry of key economic events scheduled later this week. With retail sales and manufacturing indicators featuring on the economic calendar, the crucial inflation readings due for release in the latter half of the week will likely have an impact on the monetary policy stance that the BoJ plans to adopt this year. The outcome of Italian elections and the Fed Chairman, Ben Bernanke’s testimony will have an influence on currency markets in the next few trading sessions.