EURUSD – ratings do not hurt, market awaits Ifo

Moody’s delivered on its’ promise of a multi-notch downgrade of the Irish rating and slashed it by 5 grades to Baa1 (BBB+ equivalent). On top of this, the agency warned Greece (it also warned Spain this week) about a possible downgrade. The agency which so far maintained the highest (and most unrealistic) ratings among the Big3 seems now to be the most aggressive cutter. However, a lack of any noticeable reaction on the market suggest a reasonably low chance of reigniting the full scale market crisis this year.

Meanwhile, a successful defense of the support at 1,3170 offers some chance for a rebound, even to 1,3447-1,35 even if a wave patterns seems to be unclear at the moment (we pointed at some alternatives yesterday). Bulls would love to see another positive surprise from the Ifo index which once again is expected to tick down, even though it defied such expectations so many times rising in 19 out of the last 20 months! The Ifo index has some long-term significance as well. A superb economic climate in Germany is a good indicator of the eventual resolve for the euro crisis (even if there is a Spanish phase of the crisis which we see in the Q1’11).

Equity markets – Congress extends tax-cuts

US Congress passed an extension of tax-cuts for next 2 years worth estimated 858 bln USD. This action removes a risk to a still fragile recovery in a private demand in the US, yet poses a risk to a long term fiscal stance. In the short term, cuts are welcomed by equity markets especially as they come on top of the solid list of decent economic reports released this week (retail sales, output, early activity indices). US indices stay close to ’10 highs but the news isn’t enough to push them higher and we think there’s a good chance for a correction past the holiday period.  

Events to watch – German Ifo index

German Ifo index is the final reading of the major economic releases this week (4.00 ET, 10.00 CET, consensus 109,1 pts.). Next week also doesn’t bring about true market movers. Therefore, we expect a relatively sanguine trade on equities and mostly technical-driven moves on the key currency pairs, with levels 1,3170 and 1,35 crucial for the EURUSD and 84,40 for the USDJPY..

Przemysław Kwiecień PhD, Chief Economist

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