EUR/USD plunged 42 pips to $1.2548 at the start of the European trading session after Moody’s downgraded 15 of the world’s largest banks by between one to three notches.
Moody’s last night downgraded major financial institutions citing that the banks affected have significant exposure to risks of outsized losses, and that the new rating more closely reflects the current fragile funding conditions and the wider credit spreads.
The move was not a big surprise to the markets as the ratings agency had announced in February that a review to downgrade the major banks was underway. However, the downgrade does exert more pressure on the financial system and raises contagion fears, which is why the euro has reacted negatively against the US dollar this morning.
Also weighing on EUR/USD today was the fall of German business confidence for June, which fell to the lowest level in more than two years. The IFO business climate index dropped for the second month in a row to 105.3 from 106.9 in May, as the eurozone crisis hurt the region's largest economy.