Euro Stays Pressured on Downgrade Worry

Market sentiments remain pressured by threat of European downgrades by rating agencies. After S&P and Moody's, Fitch criticized yesterday that there is a "lack of comprehensive solution" to the European debt crisis and that "increased short-term pressure on Eurozone sovereign credit profiles and ratings". Fitch warned that "the crisis will continue at varying levels of intensity throughout 2012 and probably beyond, until the region is able to sustain broad economic recovery." Fitch also forecasted a "significant economic downturn across the region". Fitch also urged ECB to "step up its actions in support of its sovereign shareholders as a quid pro quo for institutional and legal changes that gave the ECB greater confidence in the long-run commitment of euro-zone governments to fiscal discipline appear to have been misplaced".

Euro is seen broadly weak since the week started. EUR/USD's break of 1.3212 support is raising the chance that whole medium term decline from 1.4939 is resuming. Near term focus is back on 1.3145 support and break will confirm and should send the pair through 1.3 psychological level. EUR/GBP also dived sharply to resume the decline form 0.9083 and should be now heading to 0.8284 key support next. A main source of weakness could be found in today's bond auctions. The EFSF bailout fund is set to auction as much as EUR 2b of 91 day bills today. Greek will auction EUR 1.25b of 182 day bills. Belgium will sell EUR 1.2b of short term debts while Spain will sell 364 day an 553 day bills.

FOMC meeting will be another major focus. With operation twist started and recent economic data improved, policymakers would prefer to stand on the sideline and monitor the developments. The meeting would again focus on tools to improving communication with the market. However, we do not expect any material outcome at least until January when Chairman Ben Bernanke holds a press conference and when the latest economic projections are released. More in FED to Stay on the Sideline in December. Discussion on Improving Communication to Continue.

Concerning the dataflow, UK's CPI probably moderated to +4.8% y/y in November from +5.0% a month ago. Core CPI is expected to have eased to +3.3% from +3.4% in October. In the Eurozone, ZEW economic sentiment probably slipped to -60.3 in December from -59.1 in the prior month. In the US, retail sales might have climbed +0.6% m/m in November after a +0.5% gain in October. Excluding auto, the reading probably gained +0.4%, easing from +0.6% in October. The FOMC meeting will be held in the US session but policymakers are not expected to adjust the monetary policy.