S&P Puts EU On ‘Creditwatch Negative’ Ahead Of Key Events
THE TAKEWAY: S&P Puts EU AAA Credit Rating Under Negative Credit Watch > Includes Large Commercial Banks In Euro-Zone > More Pressure On EU Summit
Standard and Poor’s announced that the EU’s AAA rating is on ‘creditwatch negative’ following the move from earlier this week, and went onto say the large banks across the euro-area face a similar fate as European policy makers prepare for the Summit in Brussels. Indeed, the warning shots fired by S&P puts increased pressure on the EU to draw up a credible solution over the next two-days, but optimism surrounding the key meeting may deteriorate should we see the group struggle to meet on common ground. As government officials in Germany talk down expectations of seeing a positive development this week as Chancellor Angela Merkel and French President Nicolas Sarkozy push to amend the treaty and the two leaders may lay the foundation for a euro-area exit mechanism as the governments operating under the single currency struggle to get their house in order. At the same time, there are rumors that the group will unveil a ‘bazooka’ to deal with the sovereign debt crisis, and it’s imperative for the EU to make headway over the coming days as the summit takes center stage.
The EUR/USD tipped lower following the announcement and we are likely to see the single currency face additional headwinds over the next 24-hours of trading as market participants expect the European Central Bank to lower the benchmark interest rate by another 25bp in December. As the ECB’s asset purchase program comes under increased scrutiny, we may see central bank President Mario Draghi continue to move away from the nonstandard measures, but the Governing Council may have little choice but to expand its balance sheet further as the governments operating under the single currency become increasingly reliant on monetary support. As the EUR/USD continues to trade within a downward trending channel, we will need to see some positive developments coming out of Europe to see a reversal in the exchange rate, and the euro-dollar looks poised to threaten the rebound from 1.3145 as the fundamental outlook for the region turns increasingly bleak.
--- Written by David Song, Currency Analyst
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