Moody’s Rating Action on Spain Has Limited Impact on EUR/USD

On Wednesday, trading in the EUR/USD cross rate was remarkably calm for most of the session, especially if one takes into account the rating action of Moody’s on Spain. Just before the start of European trading, the rating agency put the credit rating of Spain on review for a possible downgrade. EUR/USD tested bids just below the 1.33 mark after the announcement, but at first there were no follow-through losses. EUR/USD settled in a sideways trading pattern in the 1.33 area during the morning session in Europe.

The pair even temporary reversed the earlier losses going into the US trading session. So, the damage from Moody’s rating action on the euro was very muted. The US economic data confirmed the scenario of a gradual recovery. At first, the reaction of the currency markets to these data was limited. However, later in the session the pressure on EUR/USD was getting bigger. We didn’t see a specific news event that triggered the move.

Looking at the price action in other cross rates, the move should in first place be seen as dollar strength, rather than euro weakness. The move occurred in step with a another down-leg of US Treasuries/rise in US bond yields. At the same time, global equities ceded ground, too. This combination of rising interest rate support for the dollar in an environment of investor caution on risk obviously was not favorable for the single currency. So, EUR/USD started a gradual decline that continued throughout the whole US trading session. The pair closed the trading session near the intraday lows at 1.3214, compared to 1.3378 on Tuesday evening. The pair is still seen in this area this morning.

EUR/USD Thursday, December 16th

Today, currency traders will keep an eye on the advanced reading of the European PMI’s. Last month, the PMI’s, especially of the core European economies, showed quite a remarkable progress. It will be interesting to see whether this strong momentum can be maintained. Maybe the risk is for a small set-back of last months strong performance. Such an outcome might be (slightly) negative for the euro. The EU CPI data are interesting, but probably no big issue for the currency market.

In the US, the calendar contains also quite a long series of economic data releases. However, we don’t expect them to change the broader picture for currency trading. The US housing data are notoriously volatile. The Q3 current account is interesting for economists, but from a market point of view it is a bit old news. The claims and the Philadelphia Fed have probably most market moving potential. Of late, positive US data, via their impact on US bond yields, were dollar supportive.

Next to the data there will of course be a lot of media coverage/analysis of the European crisis ahead of the EU summit that is taking place this evening and tomorrow. President Van Rompuy will propose a text, that will make it possible to integrate the ESF (the safety mechanism for after 2013) into the EU institutional framework. From a market point of view, this won’t be a major event.

Next to this ‘juridical’ issue, there will still be a lot of speculation on other issues as there are a possible increase of the amount of the EFSF, the issuance of an E-bond and/or the need for raising the capital of the ECB. Over the previous weeks, the debate on these issues most often weighed on the single currency. We still assume that investors will stay cautious to take (additional) euro exposure on board before the outcome of the summit will be known. That said, we have the impression that the euro has become a bit less sensitive to ‘negative’ headlines on the E(M)U crisis (yesterday’s reaction the rating action on Spain). So, the dollar side of the story might at least be as influential as the euro story. Nevertheless, the combination of the two still suggests further EUR/USD weakness short-term.

Content provided by: KBC Bank