Talking Points:
- Italy outlook revised lower to negative from stable by S&P, affirmed at ‘BBB’
- Fitch affirms UK at ‘AA’ stable outlook while Germany affirmed by S&P at ‘AAA’ stable
- The currency’s muted response is largely due to the report’s release time
After a week of trouble for equities, a final blow was dealt to global markets following the market’s close on Friday. Rating agency Standard & Poor’s downgraded Italy’s outlook to negative from stable amid ongoing budget disagreements with the European Union.
Conversely, S&P affirmed Germany at ‘AAA’ with a stable outlook. While Fitch ratings released their reports on the United Kingdom, Norway, Sweden and Denmark.
Italy
The EU member has become the focus of global markets as a showdown between the government in Rome and European Union officials in Brussels highlights the growing divide between the two parties. The budget disagreement is seen as a risk to the bloc’s stability and the common currency, resulting in sustained EUR/USD weakness as of late. Further, an identical outlook downgrade was issued last week by Moody’s.
EUR/USD Price Chart Hourly, October 22nd – 26th
Given the time of the report’s release, EUR/USD was largely indifferent as European banks were closed and the weekend had begun. While Friday’s immediate response may have been negligible, outlook cuts are often preludes to a ratings downgrade and thus a downgrade from two agencies is a worrisome sign for Italy and the European Union if an agreement is not met.
United Kingdom
Also affirmed Friday was the United Kingdom. Fitch affirmed the nation at ‘AA’ with a negative outlook. Political divisions within the UK regarding the nation’s withdrawal from the EU and the framework for future EU-UK relations were cited as key reasons for the negative outlook. The Pound was similarly unresponsive.
GBP/USD Price Chart Hourly, October 22nd – 26th
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Germany
Unsurprisingly, Standard & Poor’s affirmed Germany at ‘AAA’ with a stable outlook. Germany continues to show consistent economic strength and fiscal responsbility.
Norway, Sweden and Denmark
The Nordic countries also had their ratings affirmed, all receiving an ‘AAA’ grade accompanied by stable outlooks. The affirmations were not surprising given the fiscal responsibility and economic condition of each country.
Larger Implications
While not immediately felt, the downgrade will surely weigh on global market sentiment. The outlook is effectively a vote of no-confidence from Standard & Poor’s and the Italian budget issues have been one of the headline issues plaguing markets in recent weeks.
--Written by Peter Hanks, Junior Analyst for DailyFX.com
Contact and follow Peter on Twitter @PeterHanksFX
Read more: S&P 500 to Look Elsewhere for Support After Disappointing Earnings
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