Market Optimism ahead of ‘Merkozy’ meeting

Positive sentiment abounds today over hopes that European leaders will agree on a definitive plan to solve the Eurozone debt crisis, at this week’s crucial summit. This has lifted Sterling and the Euro against the US Dollar. However concerns persist over the health of the British economy following weak manufacturing PMI last week. Today, the French President, Nicolas Sarkozy, and the German Chancellor, Angela Merkel, are scheduled to meet to discuss a plan for stricter enforcement of the region's deficit rules and to fine tune the Eurozone’s proposed fiscal integration. This issue is likely to be the focal point of the upcoming EU summit. This weekend, Italy outlined a €30 billion three-year austerity plan to be presented by the Italian Prime Minister to both houses of Parliament today. Meanwhile, the final composite Purchasing Managers Index (PMI) in the Eurozone, rose to 47 from 46.5 in October, but was down from the preliminary reading of 47.2. Trading in currency markets is likely to be determined by developments and news from the Eurozone.

Pound Sterling – UK Markets

The Pound is trading higher against the US Dollar amid optimism that Eurozone leaders will be able to formulate a plan to solve the region’s debt crisis. Additionally, the services sector picked up in November, rising to 52.1 from 51.3, against expectations of a decline to 50.7. With domestic demand remaining weak and with the Eurozone sovereign debt crisis weighing on the domestic economy, the UK industry body, EEF, and business advisers, BDO, have slashed their forecasts for 2012 manufacturing growth from 2.2% to 0.9%. They added that the contraction in order books is expected to be particularly severe over the next three months. Meanwhile, markets are expected to closely monitor the outcome of the BoE’s monetary policy meeting scheduled for Thursday. The central bank is expected to hold interest rates at 0.5% and leave the amount of quantitative easing unchanged at the current levels.

US Dollar – US Markets

Growing optimism that Eurozone leaders would work towards solving the region’s debt crisis has led the US Dollar weaker. Moreover, Italy’s plan to adopt austerity measures has improved risk appetite further. Robust private sector payrolls data and an unexpected drop in the US unemployment rate last week have dented speculation over additional stimulus to the US economy. The unemployment rate in the US declined to 8.6% in November, the lowest level since March 2009, compared to a rate of 9.0% recorded in October. Additionally, the US economy added 120,000 new jobs in November, compared to a total job addition of 100,000 jobs in October. We expect the US Dollar to continue to track developments from the Eurozone today.

Euro – European Markets

Approval of a three year austerity plan worth €30.0 billion, including spending cuts, tax hikes and pension reforms, by the Italian government, has led the Euro higher against the majors this morning. Moreover, optimism has been fueled by expectations that today’s Merkel-Sarkozy meeting will help intensify bilateral efforts to establish fiscal rules and negotiate proposals on treaty changes. A Sunday Times report, indicating that the ECB is preparing a €1.0 trillion cash infusion, has helped the Euro to further consolidate gains. The currency is likely to strengthen ahead of the EU summit and could trade on developments from the Sarkozy-Merkel meeting today.

Other Currencies – Highlights

The Kiwi Dollar is trading higher after Moody's Investors Service maintained its ‘Stable’ outlook on the New Zealand banking system. Moreover, easing concerns over the debt crisis in the Eurozone have aided risk appetite and provided strength to the New Zealand Dollar. However, gains were limited after data from China indicated that the services PMI in China fell for October. Additionally, the New Zealand Treasury Department indicated that it expects the domestic economy to grow at about 3% for the year ending March 2013, compared to its previous estimate of 3.4%. Meanwhile, the value of building activity in New Zealand declined 2.3% in the third quarter of 2011.