The ink had barely dried on the latest Autumn Statement before ratings agency Fitch warned in no uncertain terms that the UK government’s failure to hit his debt targets “weakens the credibility of the UK’s fiscal framework which supports the rating” and would once again review the triple “A” rating after the March 2013 budget.
This statement suggests that it’s fairly certain that the rating will be cut next year; however credit ratings aren’t what they once were three years ago when 10 year gilt yields were above 4%. The world has become a much changed place since then and it seems quite likely that a cut in the rating wouldn’t be the disaster it might have been then, as the recent US and French experience has shown.
Certainly bond markets aren’t concerned by the possibility of a downgrade, with UK 10 year gilt yields falling from 1.81% to 1.775% by the end of yesterday’s trading.
Today’s Bank of England rate meeting is likely to be a non-event with policy expected to remain unchanged on the amount of QE and rates, while just before that the latest Trade balance numbers for October are expected to show a deficit of £3bn, a slight increase on September.
In Europe the economic data continues to deteriorate with yesterday’s Eurozone retail sales numbers showing a sharp fall in October of 1.2%. Today’s German factory orders for October are expected to improve slightly on a monthly basis, but to drop even more on an annualised basis by 5.6%, while the latest GDP revision for the Euro area is expected to be confirmed at a -0.6% contraction for Q3 annualised.
The latest ECB rate meeting is expected to see rates left unchanged, however the press conference is expected to see Mr Draghi downgrade the central banks growth and inflation forecasts once more in the face of the recent poor Q4 data seen in the past few weeks. Recent comments from Mr Draghi have suggested that he expects a recovery in the second half of 2013, and it will be particularly noteworthy as to whether he stands by that assessment later today.
As an aside ratings agency Standard and Poor’s has put Greece into (SD) selective default, not unexpected given the recent so called “voluntary” debt buyback plan.
In the US the latest weekly jobless claims are expected to fall again as the hurricane sandy effect continues to diminish with expectations of a fall to 380k from 393k. Yesterday’s ADP numbers for November were a slight disappointment coming in as they did below expectations at 118k, raising the possibility that tomorrow’s payroll number will be similarly weak.
EURUSD – a higher high yesterday at 1.3125, however the euro closed lower suggesting the potential for a pullback. The September highs at 1.3175 remain the key obstacle to a break towards the highs this year at 1.3485.
Interim support remains at Tuesday’s lows at 1.3040.
For the downside to open up again we need to see a break back below the 50 day MA and 1.2900 retargets a move towards the 200 day MA at 1.2790, while below that we also have trend line support from the 1.2050 lows which also comes in at 1.2790.
GBPUSD – running into selling interest above 1.6120, with resistance behind that at 1.6180.
Support remains at the 50 day MA at 1.6045. Only a drop back through 1.6045 undermines this bullish scenario and targets a retest of the 1.5960 lows of last week.
Major trend line support remains at 1.5850 from the 1.5270 lows, as well as 1.5660.
EURGBP – the euro is starting to struggle as it gets closer to the October highs at 0.8165.
A move higher above 0.8165 can only be undermined by a move below the 0.8100 level towards the 200 day MA support at 0.8050. Also on the downside we have trend line support at 0.8015 from the July lows at 0.7755.
USDJPY – still within the potential double top pattern on the four hourly charts after the base held at 81.75. If we break below 81.70 then the potential is there for a move towards 80.50, and even 79.90.
We need a break above the 82.80 level to target a move towards the March highs above the 84.00 level.
Only below the 80.50 level suggests a move back towards the November lows at 79.00.