BoE to ease financial stress

In a move aimed at offering some respite to the financial system, the Bank of England has offered UK banks access to a new supply of emergency Sterling funding, citing the “continuing exceptional stresses” in financial markets as a reason for the move. Meanwhile, data released this morning indicated that the shop price index rose at its’ slowest pace in a year for November while industrial output for October fell more than expected and at its fastest pace in six months. After the unprecedented warning from Standard & Poor’s (S&P) to 15 Eurozone nations earlier, market optimism has revived based on speculation that Eurozone leaders may find a constructive solution at the crucial upcoming EU summit. Reports suggest that measures to be agreed at the summit include combining the existing temporary and planned permanent rescue facilities to bolster the Eurozone’s bailout fund. In other news, retreating bond yields in Italy and France have helped to further ease market concerns over the debt crisis.

Pound Sterling – UK Markets

The Pound is trading higher against the US Dollar as risk appetite among investors improved, amid optimism that policymakers in the Eurozone would formulate plans to increase the region’s bailout fund. Meanwhile, the Bank of England took measures to protect the British financial system against another credit crunch by offering banks access to a new supply of emergency Sterling funding. However, Sterling weakened against the Euro after data indicated that shop price inflation in the UK slipped to the lowest level in one year, as retailers have been forced to slash prices owing to a drop in purchasing power. Chairman of the Office for Budget Responsibility, Robert Chote, opined that George Osborne’s fiscal mandate does not protect Britain's long-term economic interests. Both industrial output and manufacturing output fell 0.7% in October, dropping more than expected and further pressurising the Pound. This has again shifted focus onto domestic growth with market participants also keeping an eye on the NIESR GDP estimate for November, which is scheduled for release later today.

US Dollar – US Markets

The US Dollar has declined against Sterling and the Euro as traders have turned risk averse amid reports that policymakers in the Eurozone are working towards doubling the region’s rescue fund to tackle the debt crisis. Yesterday the US Treasury Secretary, Timothy F. Geithner, backed German-French efforts for closer European co-operation and urged policy makers to work with central banks to erect a “stronger firewall” to end the debt crisis in the Eurozone. With consumer credit being the only major economic release slated for today the greenback is expected to find direction from news flow and Eurozone updates. Additionally, the weekly jobless claims data and the consumer sentiment data, due for release this week, is expected to provide further insight into the latest US economy trends. We anticipate the US Dollar to trade lower against the major currencies today as market participants are becoming increasingly confident that a solution to the European debt crisis may be reached at the EU summit later this week.

Euro – European Markets

The Euro has strengthened against Sterling and the US Dollar amid market speculation that leaders in the Eurozone will agree to combine the existing European Stability Mechanism with a temporary fund to boost the overall rescue fund. Moreover, reports indicate that the European Council President, Herman Van Rompuy, is expected to present a fast-track measure for fiscal union of the European nations, which would not require lengthy parliamentary ratification. Additionally, the Euro moved higher against its’ major counterparts after German Finance Minister, Wolfgang Schaeuble, stated that S&P’s ratings warning could spur Eurozone leaders into increasing efforts to resolve the debt crisis at the EU summit. Meanwhile, data slated for release later today is expected to indicate a recovery in German industrial production for October. Tomorrow could be a crucial day as the ECB is expected to lower its benchmark interest rate. We expect the Euro to move higher against the major currencies on optimism surrounding the run up to the EU summit.

Other Currencies – Highlights

The Canadian Dollar is trading higher against its major counterparts after the Bank of Canada (BoC) maintained its’ benchmark interest rate at 1% yesterday. Additionally, policymakers indicated that growth in the domestic and US economy had been better-than-expected, thereby easing concerns that the central bank would implement additional easing measures. Moreover, reports that European policymakers would work towards increasing the regions’ bailout fund have also aided the positive trading sentiment in the Canadian Dollar. In data released yesterday building permits in Canada rose 11.9% MoM to C$6.3 billion in October, following a 4.1% decline recorded in the previous month and sharply higher than market consensus for a 1.9% growth.