European stocks were also hurt by the negative news but follow on effects in the US Session were avoided as the Markets were closed for Martin Luther King Day. The US stock markets were closed on Monday for the Martin Luther King, Jr. holiday, but that didn't mean that risk aversion couldn't feed through from Europe into US trading.
Indeed, Monday's most exciting price action was contained to the European trading session, as news that the Royal Bank of Scotland may report the biggest recorded annual loss in UK corporate history sparked a bout of selling in stocks and heavy buying in the US dollar (highs-GBP/USD-1.4911) and Japanese yen. In fact, both the dollar and the yen ended the day up over 1 percent against the euro and nearly 2 percent versus the British pound. With no data due to be released from the US on Tuesday, the outlook for safe-haven currencies and carry trades depends heavily on risk trends.
The British pound fell to a six-year low versus the dollar after the UK government said it would spend an extra £100 billion ($142 billion) to support the nation's banks, a second lifeline in three months, and increase its stake in Royal Bank of Scotland Group Plc. Looking ahead today, UK data is forecasted to reflect a sharp drop in inflation pressures, which should allow the BOE additional leverage to cut rates.
The Consumer Price Index (CPI) for the month of December is expected to drop 0.9 percent dragging the annual rate down to 2.6 percent. If CPI cools more than forecasted the GBP/USD could pull back toward falling trend line support at 1.4300/50, especially since the BoE suggested in their last policy statement that they may leave rates unchanged next month. On the other hand, indications that price pressures are not falling sufficiently could lead the British pound to gain.
The Euro enjoyed buoyancy in early Asia before news of the S&P downgrade of Spain's credit rating and European banking stocks tanked. EUR/JPY had a dramatic change of sentiment swinging from 2% gains to 2% losses. Also the European Commission slashing growth forecasts for 2009 to -1.9% from -0.1% did not improve the situation. Overall the EUR/USD traded with a low of 1.3060 and a high of 1.3381 before closing the day at 1.3090.
The Euro fell more than 1 percent against the US dollar on Monday amidst deteriorating investor confidence and dour forecasts by the European Commission. The Commission said that the Euro-zone's economy will contract by 1.9 percent in 2009, which would mark the first negative result since the inception of the Euro, before growing by 0.4 percent in 2010. Looking ahead, German Zew Survey is forecast at -44 vs. -45.2 in January. Furthermore, the unemployment rate is anticipated to climb from 7.5 percent to 9.3 percent in 2009 and 10.2 percent in 2010.
Finally, inflation pressures are likely to cool substantially as CPI is expected to fall from 3.3 percent in 2009 to 1 percent in 2009, following by a pickup to 1.8 percent in 2010.