Whilst the euro will remain firmly centre stage this week, the warning by credit ratings agency Moody’s that the US could lose its top credit rating was the biggest market mover yesterday as it sent the dollar to a four month low against both the pound and euro.
Moody’s threat centres around next year’s budget talks as it warned that a failure to produce policies that reduce the nation’s debt could result in the credit downgrading.
The markets are also cautious around the fortunes of the dollar as the Federal Reserve meet tomorrow with the majority of analysts expecting Ben Bernanke to announce a third round of Quantitative Easing (QE) to provide further stimulus to the US economy following some disappointing economic data of late.
Ahead of the decision by the German constitutional court today and the result of the Dutch general elections tomorrow, the pound remained relatively unchanged against the euro. It received support from some rare encouraging UK economic data yesterday. Data out yesterday showed that the UK’s trade deficit narrowed more than expected in July and the housing market data was not as weak as expected in August. A separate report from recruitment firm Manpower said companies were planning to increase hiring.
Today, we expect to hear from the German Constitutional Court and its ruling on whether the permanent euro zone rescue fund, the European Stability Mechanism (ESM) is constitutional or not despite a late legal challenge at the beginning of the week by CSU party member Peter Gauweiler who asked the court on Monday to postpone the decision in order to study the European Central Bank’s bond purchase plan announced last week. His request was turned down and a decision is expected later on today.
German Finance Minister Wolfgang Schauble has on several occasions stated that in his opinion, the court would reject the notion of the ESM’s “incompatibility”.
In a poll conducted by Reuters last week, 20 law professionals predicted a favourable ruling for the ESM. The decision in Germany is the last major challenge that the ESM must overcome in order to become effective and replace the temporary rescue fund, the European Financial Stability Facility (EFSF).
Meanwhile, International Monetary Fund (IMF) deputy managing director Zhu Min stated yesterday that the euro zone sovereign debt crisis still has a long way to go. Speaking at the World Economic Forum in Tianjin, China, he said “We should not underestimate the negative impact from the European crisis to the whole world. This is very important. The growth side has a profound impact on the global economy”. Zhu also claimed that a greater deterioration in Europe could result in a loss of up to have 1.5% to 2% from US and Japanese economic growth rates and 1% off the Chinese economic growth rate.
Whilst there is a raft of UK economic data out today including the latest UK unemployment data, the markets will be fully focused on the decision by the German constitutional court.