Euro Falls Back as S&P Cuts Ireland's Credit Rating, British Pound Maintains Narrow Range

Euro pared the overnight advance to 1.2725 as Standard & Poor's lowered its credit rating for Ireland, and the single-currency may continue to trend lower over the remainder of the week as price action continues to trade below the 100-Day SMA at 1.2743.

Talking Points

• Japanese Yen: Pares The Sharp Rally From Previous Day
• Pound: Fails To Trade Above 200-Day SMA
• Euro: German Business Confidence Unexpectedly Improves For Second Month
• U.S. Dollar: Durable Goods Orders, New Home Sales on Tap

S&P cut Ireland's sovereign credit rating to AA- as the ratings agency projects the region will now need as much as EUR 50B to recapitalize its banking system amid an initial forecast of EUR 35B in funds, and the group went onto say that "a further downgrade is possible if the fiscal cost of supporting the banking sector rises further."

In response, Ireland's National Treasury Management Agency said that the negative outlook paired with the downgrade was "flawed" as "investors continue to show strong demand for Irish government debt," but the region continues to face an uphill battle as the government struggles to manage its public finances and copes with higher borrowing costs. As a result, the European Central Bank is widely expected to maintain the expansion in monetary policy and may look to support the real economy going into the following year, and President Jean-Claude is likely to hold a dovish outlook over the medium-term as he expects to see subdued price growth going forward. Nevertheless, the economic docket showed business confidence in Germany unexpectedly increased for the second consecutive month in August, with the IFO survey increasing to a three-year high of 106.7 from 106.2 in the previous month amid projections for a 105.7 print, while the gauge for future expectations slipped to 105.2 from a revised 105.6 in July.

The British Pound halted the three-day decline and pushed to a high of 1.5461 during the European trade, but the lack of momentum to push back above the 200-Day SMA at 1.5468 may keep the GBP/USD within a narrow range throughout the day as price action holds above the 50-Day at 1.5366. Meanwhile, U.K. Treasury Minister Mark Hoban defended the government's austerity measures during an interview with BBC Radio and said that the challenges are "very clear," and went onto say that the new coalition has "gone through the most detailed and rigorous assessment of the distributional impact of this budget on families" as it aims to tackle the budget deficit. As the government withdraws fiscal support and cuts public spending, the Bank of England may have to support the real economy throughout the second-half of the year given the ongoing slack within the private sector, and Governor Mervyn King may continue to talk down the risks for inflation as he expects price growth to fall back towards the 2% target over the next two-years.

The U.S. dollar bounced back against most of its major currency counterparts ahead of the North American trade as investors scaled back their appetite for risk, and the greenback may appreciate further throughout the day as equity futures foreshadow a lower open for the U.S. market. Nevertheless, the economic docket is expected to show a 3.0% jump in orders for U.S. durable goods for the month of July after contracting 1.0% in the previous month, while new home sales in the world's largest economy is projected to hold flat at an annualized pace of 330K for the same period, but the ongoing weakness in the private sector could lead to a dismal release, which could drag on the dollar as investors weigh the prospects for a sustainable recovery.