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%.

• Germany Will Borrow Less in 2013 Thanks To Low Unemployment
• UK Deficit Grows in Q3 To 24 Year High
• Caution over Southern Europe
• Pimco Bullish on Italian and Spanish Debt
• Eurozone Ministers Agree on Bail-out Banking Deal
• Irish GDP Posts Strong Growth Boosted By Construction
• Volcker Rule Not as Damaging as First Feared
• S&P Downgrades European Union’s AAA Rating
• Merkel’s First Speech After Reelection Hints at Europe Plans
• German Ifo Business Sentiment Rises in November
• ZEW Analyst Says Improved US Outlook Drove German Confidence
• London Has 25 Percent of Britain’s Mortgage Loans
• UK Analysts Forecast FTSE To Reach All Time Highs in 2014
• UK Inflation Falls to Four Year Low
• France at Risk of Recession
• Britain Introduces New Banking Reforms
• ECB Ready To Fight Deflation
• Portugal Passes Troika Review
• ECB Draghi Worried About Bank Resolution Plan
• European PMIs Positive But Point to Growing Germany And France Divide
• Slovenia Bad Bank to Absorb $6.1 Billion of Bad Loans
• Portugal Favours Lower Short Term Loans To Exit Bailout
• Germany Enters a Grand Coalition

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.