Forex: EUR/USD Closes Quietly, Pound Collapses On U.K.'s Downgrade

Includes: ERO, EU, FXE
by: FXstreet

Guess which currency will see a gap opening on Monday's Asian opening? When the market was wrapping up Friday's session, Moody's published its decision to remove the Britain AAA status and cut both government and BoE ratings by one notch to Aa1 from Aaa. GBP/USD collapsed around 100 pips in minutes, just ahead of Friday's close.

The sterling finished on Friday with its second consecutive weekly loss, but this time it was different. The forecast for the next week has been revised down as Moody's seems to be helping create a weak pound. The GBP/USD finished the week below the 1.5200 frontier and tested levels around 1.5160, just ahead of the two-and-a-half-year low of 1.5130.

The GBP/JPY collapsed from 142.50 to 141.50 on its way to one-month lows around 141.30. Moody's considers that the "continuing weakness in the U.K.'s medium-term growth outlook with a period of sluggish growth," will be extended into the second half of the decade.

Earlier on Friday, Sebastien Galy of Societe Generale wrote that the pound is likely to continue falling, pretty much with the blessing of the U.K.'s MPC and the chancellor. Galy stated that U.K. is a "quiet debaser" that doesn't intervene when its currency is down, but smiles when it falls. "If the hope is that a weak pound will aid recovery, we suspect that hope will be disappointed for quite a long time. If the hope is that it will result in a weaker pound, it will succeed."

Next week, the second Q4 GDP estimate will be released and is likely to remain unchanged from the initial estimate of -0.3% q/q (0.0% y/y). Consumer Credit, Mortgage Approvals, and Manufacturing PMI will push additional pressure on the pound.

EUR/USD Below the 1.3200 Area

Following the seven-month uptrend line support break at 1.3245, the EUR/USD fell to 1.3145, the lowest since Jan. 10, where the pair used it as current bottom. The sentiment surrounding the bloc currency has given up any attempt of correction for the time being and now focus are on Italian elections.

The euro fell to a fresh six-week low vs. the dollar as investors found the LTRO results to be another reason to sell the single currency. As for the short term and with the EUR/USD closing down 0.04% at 1.3184, the next support levels await at 1.3122 (MA100d) followed by 1.3039 (low Jan. 10) en route to 1.3018 (low Jan. 7). On the flip side, a breakout of 1.3246 (high Feb. 22) would expose 1.3289 (MA55d) ahead of 1.3343 (MA10d).

TD Securities team notes that the recent lower trend remains intact and will be hard for the market to shake off. "Peripheral sovereign spreads are steady ahead of the Italian election but the EU Commission downgraded its growth outlook for 2013, core EZ-US short-term rate spreads continue to widen out against the EUR and banks opted to repay a lot less of the second 3Y LTRO cash back than was expected."

"All told, we think the backdrop limits intraday EUR gains to the 1.3200/20 area and that we may see another push back towards 1.3140/50 support. Ultimately, we think EUR/USD may test 1.28/1.29," TD Securities concludes.

FOMC minutes also put bearish pressure on the pair as hints are signaling a possible reduction of quantitative easing measures as early as this year. Carolin Hecht, analyst at Commerzbank, points out that the "continued recovery of the U.S. economy, combined with the possibility that the Fed might become significantly less expansionary in the second half of the year, is the strongest plus for the greenback."

The outlook for the EUR is completely different. "After Mario Draghi had prepared the markets for a more cautious economic outlook for the euro zone, a disappointing PMI increased the pressure resting on the euro," Hecht comments. "EUR-USD has clearly run out of steam on its way up."

The Week Ahead

Looking ahead to Monday's docket, risk trends would be put to the test after the flash manufacturing PMI in China ahead of the trade balance figures in Italy. Across the pond, a speech by the Fed's Lockhart would precede the Dallas Fed Manufacturing Business index.

Another events this week:

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