Week in FX Europe – European Union on the S&P Naughty List Downgraded to AA+

On Friday credit rating agency Standard & Poor’s downgraded the credit worthiness of the European Union. The news came just as European leaders were part of a budget summit. The EU was stripped of its AAA rating with a new rating of AA+. S&P cited the lack of cohesion from member states as one of the reasons for the downgrade. Given the fact that Germany stands against several budget and banking reforms adds to potential credit risk.

European leaders were quick to dismiss the rating and markets have not reacted fully to the news. The US lost its AAA rating in 2011 and the immediate effects were the opposite as yields didn’t follow the new ratings.

The EUR/USD continued to trade lower, but that was more the effect of the Federal Reserve announcing the start of the bond-buying taper. Bernanke’s long awaited “surprise” announcement had been delayed so many times when it finally hit the reaction was positive. A token taper of $10 billion will be reduced from the $85 billion stimulus with no further schedule given and the flexibility to pause or even increase the size of stimulus if needed.

The GBP/USD continues to hold its ground. Earlier in the week, British Retail Sales posted a gain of 0.3%, up sharply from the –0.7% reading last month. UK employment numbers continued to impress in November and to defy the Bank of England’s forecast. Employment Change continues to post sharp drops, a pattern which we’ve seen since mid–2013. The unemployment rate dropped unexpectedly to 7.4%, its lowest level since May 2009. The markets had expected the rate to remain unchanged at 7.6%. Meanwhile, the breakdown of the BOE’s vote on QE and the Official Bank Rate were both unanimous (9–0) decisions. At the last policy meeting, the Bank maintained QE at 375 billion pounds and the Official Bank Rate at 0.50%.

WEEK AHEAD

* CAD Gross Domestic Product
* USD Durable Goods Orders
* JPY National Consumer Price Index

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza