The euro has started the week on the back foot versus other majors, dragged down by on-going talk of debt downgrades for Europe from Standard and Poor’s, despite the fact that the EU Summit reached a deal on Friday to tighten fiscal rules. The rating agency has yet to give its opinion on the deal and its comments are eagerly awaited. Many are treating the latest deal with caution, in particular given the UK’s opposition to it. According to a poll in the UK Times voters overwhelmingly back Prime Minister David Cameron for using his veto on the pact to toughen EU treaties without any new safeguards for London’s financial centre. As a result, the new fiscal rules will have to operate as an intergovernmental agreement instead of being enforced through a treaty change, which would need unanimous support. Ireland, however, may still require a referendum on the issue but the government is awaiting formal legal advice on this.

Market sentiment will continue to be driven by events in Europe, but the focus should turn to the US tomorrow with the Fed meeting to discuss US monetary policy for the last time this year. No policy changes are anticipated but markets will be watching the tone of its statement carefully. Meanwhile, markets will be looking to available US data for further confirmation that the economy is holding up reasonably well going into the year end. Data from the euro zone, however, are not expected to be uplifting. The release of the flash manufacturing and services PMIs for December should feature top of the agenda, with the data expected to show a further deterioration in activity levels. This should further cement the markets’ view that the region is back in recession. Meanwhile, the German ZEW index is also expected to fall again as the sovereign debt crisis continues to weigh.