Central Banks in Focus

After downbeat British industrial and manufacturing data yesterday, market attention has now shifted to the Bank of England’s rate setting meeting slated for today. The BoE is expected to keep the benchmark interest rate and asset purchase target unchanged.If you are concerned about how any potential rate change might affect your currency purchase, call your dealer immediately. Meanwhile, the market expects the ECB to cut their benchmark interest rate by 25 basis points to 1% today while also announcing additional liquidity measures. Pressure on Eurozone leaders to stem the region’s debt crisis has intensified after S&P placed EU’s “AAA” long-term issuer credit rating on credit watch with negative implications, following a similar action earlier on 15 Eurozone governments. Adding to concerns yesterday a German government official indicated that the nation was not in favour of the proposal to combine the existing temporary and planned permanent rescue facilities.

Pound Sterling – UK Markets

Sterling has maintained it’s position despite persistent concerns regarding the health of the UK economy. Yesterday the NIESR stated that UK economic growth had slowed in the three months to November. Moreover, larger-than-expected contraction in British manufacturing and industrial production highlighted the fragile state of the domestic economy. In its policy meeting today the BoE is expected to adopt a cautious approach by keeping its monetary policy stance unchanged ahead of the outcome of the Brussels summit. Pound trading is likely to be volatile against the majors today and should take further direction from the interest rate decisions.

US Dollar – US Markets

The US Dollar is trading marginally lower against the EUR and flat against the GBP this morning. Markets await decisions by the ECB and the BoE for further trading cues. Yesterday’s three-month US Dollar tender operation, conducted by the ECB, witnessed a larger than expected demand for the US Dollar. On the economic front, data indicated that US consumer credit rose for the second straight month in October. The key economic release taking center stage today is initial jobless claims, which is expected to indicate an improvement in the US labour market. With the spotlight on interest rate decisions of two major central banks today, trading in the US Dollar is likely to be led by the resultant sentiment.

Euro – European Markets

Optimism surrounding the EU summit took a hit yesterday after Germany rejected merging the existing temporary and planned permanent Eurozone rescue funds. Additionally, S&P placed its “AAA” rating on the EU and ratings on several large European banks on credit watch for a possible downgrade. In a significant development France and Germany have proposed common corporate and financial transaction taxes for Eurozone nations. However, the proposal is likely to witness intense resistance from the majority of bloc members. As markets eye an expected ECB rate cut today, we predict the trade of Euros will be volatile amid uncertainty over the outcome of the Brussels summit tomorrow.

Other Currencies – Highlights

The Swiss franc has witnessed high volatility recently against the majors on anincreasing likelihood that the Swiss National Bank (SNB) would adjust the Franc’s cap of 1.20 per Euro and introduce negative interest rates, in order to stem the recent currency appreciation. The SNB had introduced a cap on the Franc in September. The Swiss Finance Minister, Eveline Widmer-Schlumpf, stated that negative interest rates and capital controls “are issues which are being examined” by a committee looking at ways to counter the currency’s strength. Weak consumer prices and slow third quarter GDP growth have increased the downside risks to the Swiss economy, fuelling speculation that the SNB will act to fend the risk of deflation. Understandably, investors are eagerly awaiting the monetary policy assessment due onthe 15 December.