France downgraded by ratings agency as Obama promises to resolve US fiscal issues

Tom Tong20/Nov/2012Currency Updates

EUR

Following the downgrade issued by Standard & Poor in January, a second major credit ratings agency has stripped France of its ‘triple-A’ status in a move that could drive up its borrowing costs and drag it further into the eurozone debt crisis. Moody’s Investors Service announced last night that it was cutting France’s sovereign rating by one notch to Aa1 from Aaa, citing the country’s uncertain fiscal outlook as a result of “deteriorating economic prospects.” Moody’s also said it was maintaining a negative outlook on France due to structural challenges and a “sustained loss of competitiveness” in the country.

Elsewhere on an annual basis German Producer Price Index grew 1.5% in October, down from +1.7% registered the previous month, according to data released today by Destatis. Market consensus pointed to an increase of 1.7%. Month-over-month German PPI remained unchanged in October, after rising 0.3% in September and against projections of +0.1.

Eurozone Finance Ministers are scheduled to meet at 16:00 GMT to discuss the region’s most problematic country. It is widely expected that the group will finally approve the distribution of long withheld aid to Greece (there is debate between €31.5 and 44 billion) and delivery the funds by December 6. There is still serious contentions here (Greece said it would entertain no more demands), so expect there to be a market reaction.

USD

The S&P 500’s biggest rally (2.0 percent) since September 6 and the Dow Jones FXCM Dollar’s biggest drop in nearly three weeks is that momentum behind a risk appetite move will run into the same wall as the initial trend. An advance in high yield and more speculative assets is a correction to a prevailing move that is even more likely to stall in these market conditions. What we need to ask ourselves is whether the sentiment wave dries up before serious technical damage is done.

US equity indexes still have some room before they retake the critical support levels that finally gave way two weeks ago. The greenback, on the other hand, is facing its critical 10,000-figure and 200-day moving average with just Monday’s corrections. Between now and Thursday’s drain, we have a few highlights that can stir risk trends. At the top of the list is the EU’s decision on Greece’s next round of aid and the US Fiscal Cliff.

GBP

The pound rose for a third day against its US counterpart Monday. That progress has more than a little to do with the weakness of the dollar. When we look at other sterling crosses, the individual currency’s performance is considerably diminished. The pound is ‘drifting’ – playing the counterpart of more influential currencies. Of note this past session, BoE member Miles said more stimulus was possible but remained a lackluster threat.

Generally speaking it was a quiet session for sterling as there were hardly any reports released from the major economies, so investors concentrated on the fact that issues like the Greek default and US fiscal cliff haven’t escalated over the weekend. There was some bad news from the Rightmove house price index which showed a decline of 2.6% in November which was weaker than its 3.6% result in October. There is no data being released today so the pound is most likely to trade on news that usually affect risk appetite.

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Written by Tom Tong

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