By: Christopher Lewis

The announcement that the S&P ratings agency was switching 15 EU countries to “credit watch negative” on Monday rocked the markets towards the end of the US session, and sent the EUR/USD pair lower after originally rising during the session. The stock markets gave up much of their gains, and suddenly the trade was “risk off”.

The upcoming EU summit at the end of the week has the possibility to be a pivotal moment in the EU debt crisis, as the members will be looking into a plan that was announced earlier on Monday that the German leader Merkel and her French counterpart Mr. Sarkozy that seems to laid the groundwork for a fiscal union. Of course, the plan will have to be ratified by all 17 EU countries to form a new treaty, but the move is seen as a possible major step in the right direction.

The mass downgrade is being threatened by S&P if the leaders cannot come up with a convincing agreement on how to solve the region’s debt crisis on Friday, and this sets up for the announcement to be one of the biggest events in this situation. With this being said, the Euro is going to be one of the most volatile currencies going forward, as this becomes a binary event: either the union gets its act together this week, or the punishment will begin. Once the downgrade comes, there is a real threat that the markets will start to sell off the Euro en masse. The opposite could happen as well, and a solution will undoubtedly send the Euro up much higher.

The coming few days will certainly be vital for the future direction of the Euro, and more specifically the EUR/USD and EUR/CHF pairs. If the Europeans can come up with something useful, there is a real chance that the pair will skyrocket in value, with the EUR/CHF being especially interesting as the Swiss National Bank is actively working against the value of the Franc to begin with. The 1.25 level has been resistance, and is seen as resistance on the weekly charts that could be a pivotal turn of events in the pair if overtaken.

With this in mind, the entry of S&P into the process by way of possible downgrades has just upped the ante in this already drawn out drama gripping the markets.