Moody’s Downgrades Portugal Debt to A1 from AA2

During the European Session, Moody’s cut Portugal’s credit rating by two notches to A1 from AA2 but maintained a stable outlook. The ratings agency said that the indebted country may need to impose further austerity measures in conjunction to those already announced. The agency also cited the fiscal position of the EMU member as likely to deteriorate over the medium-term which could depress growth prospects. Meanwhile, Fitch’s Brian Coulton affirmed the “negative outlook” for Portugal, and went onto add that the big challenge for the county remains economic growth.

Another concern of note was Moody’s anticipation of only moderate effectiveness of structural reforms over the medium to long term which will also dampen economic activity. After the downgrade, the lead analyst at Moody’s, Anthony Thomas said that no further action is anticipated on Portugal’s rating this year and he went onto add that he expects the nation to take further steps to combat the fiscal crisis by 2011. All in all, we may see the euro remain under pressure going into the North American trade as today’s announcement by Moody’s paired with the disappointing investor confidence figures will likely weigh on sentiment.

Market Reaction



Immediately following the announcement by Moody’s, the EUR/USD plunged from 1.2566 to reach an overnight low of 1.2522.



Taking a look at the daily chart, the EURUSD has extended its two day decline and now looks poised to break below the 10-day SMA after the pair neared overbought territory late last week. Going forward, investors will keep a close out on the 100-day SMA, which coincides with the lower bounds of the rising trend line. A break below this channel may expose the yearly low.