Euro suffers heavy losses by Richard driver of Caxton FX on 20-Dec-2011

T he euro suffered heavy losses last week as the markets set about pricing in a lack of any real or satisfactory progress at the Dec 9th EU Summit, and the near certainty that 2012 will be another very rocky year for the single unit. Eurozone debt downgrades are currently the number one driver of market fears at present. Moody’s has cut Belgium’s rating, Fitch has asserted that a comprehensive solution to the debt problem is "technically and politically beyond reach" and has proceeded to place major eurozone nations such as Italy and Spain on a negative watch. Action from Standard & Poor’s seems highly likely before long and it could well be France’s triple-A rating in the firing line.

The euro is trading very close to a ten-month low against the pound and almost a year low against the US dollar. Eurozone bond yields remain under pressure, the markets are clearly frustrated and it is quite clear that the rating agencies are too. In this environment, we see the euro making a difficult start to 2012.

UK data disappoint further, but sterling unperturbed

Last week’s UK growth figures added to an already gloomy economic picture. UK unemployment is now at a fresh 17-year high and retail sales contracted by 0.4% in November. Still, sterling was largely unaffected by these figures.

Rating agency action on the UK’s triple-A status is the key risk as far as sterling is concerned. The market has come to terms with low growth and high debt in the UK, but if these two factors worsen sufficiently to prompt rating agencies to downgrade the UK’s rating, then sterling could well lose the quasi-haven status it has been benefiting from in the past few months. If UK gilts lose their appeal, then so too will sterling to a certain extent.

The MPC minutes are released this Wednesday and expectations surrounding it are fairly muted. The MPC will remain in wait-and-see mode until it steps up it QE programme in February and there are not too many talking points besides the UK economy’s uncertain outlook.

Sterling is trading up above €1.19 and €1.20 before the year’s end is by no means out of reach. Against the US dollar, again sterling is looking decidedly more vulnerable but at $1.55, is actually holding up pretty well in what are very risk averse trading conditions. The euro is desperately holding on to the $1.30 level but we continue to favour the safety of the US dollar, particularly with S&P liable to make their voice heard in coming sessions

End of week forecast
GBP / EUR	1.1950
GBP / USD	1.55
EUR / USD	1.2975

Richard Driver is a Currency Market Analyst with Caxton FX and can be contacted via: www.caxtonfx.com

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