Downgrade Of UK Credit Rating Spooks The Market
The financial markets kick off the week with two key pieces of news to reflect upon. The first is of course the downgrade of the UK’s credit rating and the second is result of the upcoming Italian elections and the implications that this could have on the financial stability of the region.
While the UK’s downgrade by Moody’s had perhaps been priced into the market for a while, the Italian elections provide a much more wildcard event. The biggest fear is that recent reforms put in place could be reversed if former Prime Minister Berlusconi gains power. At this point the polls put him in a close second place.
Markets fear the unknown and instability and the big worry is that any change of policy could plunge the EuroZone’s third biggest economy back into fiscal crisis.
The big news for the dollar this week will be any hint of an end to the current round of fiscal stimulus, with the Feds Chairman, Ben Bernanke speaking on both Tuesday and Friday this week. On both occasions markets will be looking for an indication of policy direction, with expected spending cuts likely to curtail the recent US economic recovery.
Key News This Week
- Monday – EUR – Italian Election
- Tuesday - USD - Consumer Confidence, New Homes Sales Bernanke Testifies
- Wednesday – GBP - GDP (q/q), USD - Pending Home Sales, Durable Goods Orders, NZD - Business Confidence, AUD - Private Capital Expenditure
- Thursday – USD - Prelim GPD, Unemployment Claims
- Friday – GBP - Manufacturing PMI, CAD - GDP (m/m), USD - ISM Manufacturing, Fed Chairman Speaks
In Focus - EURUSD
CALL - The Euro has weakened in the face of upcoming Italian elections and has broken recent rising support.
Below 1.3290 the pair looks bearish but a break of this level would see the likely resumption of the recent uptrend.
Currency Majors
EUR/USD - (See above)
USD/JPY - The pairs gap higher and subsequent reversal could well see a temporary sell off in the pair. Support begins at 93.57, with a break here targeting further falls to next support at 92.80
USD/CHF - The outlook continues to be uncertain. Support now kicks in at the top of falling resistance, currently around 9250. Staying above this level leaves the potential to add to recent gains.
GPB/USD - The pair was hit by the downgrade to the UK’s credit ratings which adds further woes on Sterling. Having bounced from a reactionary low, the pair may well bounce. Stand aside at present.
Major Indices
DOW - Closing above 14,000 the Index continues to look broadly bullish on the prospects of continued market stimulus. A further close above this level should signal additional gains with this level holding as support.
NASDAQ - 2700 seems to have been set as the key ‘floor’ for this Index. Against this level expect a retest of recent highs at 2850.
FTSE - Despite the downgrade in the Pounds credit rating, the stock Index continues to move higher. Against support of 6328, expect a retest of 6390 highs.
Commodities
Oil – From its recent highs oil ended the week lower. Support at 93.10 could provide a level of near term support with expected gains expected to see the pair retest 94.87 support.
Gold – Having broken falling lower channel support, the precious metal is now testing this level to the upside. A close above 1590 should target further gains with recent support back down as 1555.
Stocks
Big earnings reports this week center on UK banks which could provide some good opportunity for trading. RBS (Thursday) and Lloyds Banking Group (Friday) are both set to publish preliminary results.
Also of note this week is British American Tobacco (BAT) with preliminary results due for release to the market on Thursday.
