A continent holds its breath

Risk aversion prevailed in currency markets earlier this morning, amid reports that leaders at the EU summit had failed to secure the full backing of all 27 nations for their proposed treaty changes. Additionally, Moody's downgraded the long term debt ratings of three of the largest French banks. Initial market euphoria, following the additional liquidity measures introduced yesterday by the ECB President, Mario Draghi, was short lived after the central bank failed to commit to further bond purchases as a way of stemming the debt crisis. At home the BoE kept its monetary policy stance unchanged, as was widely expected by market participants. Markets now expect the central bank to wait until February before increasing their asset purchase target. Trading sentiment in the currency market today is likely to be driven by the outcome of the Brussels summit and the surrounding news flow.

Pound Sterling – UK Markets

Yesterday, the BoE’s Monetary Policy Committee (MPC) held its benchmark interest rate at a record low level of 0.5% and decided to maintain the level of quantitative easing at £275 billion, in line with market expectations. However, the British Chamber of Commerce’s Chief Economist, David Kern, opined that the decision to leave the level of quantitative easing unchanged at current levels was disappointing. Markets will now eagerly await the minutes of this meeting slated for release on 21 December 2011. Traders expect the MPC to wait until February before committing funds for additional asset purchases. Meanwhile, Prime Minister, David Cameron, has called for safeguards on proposed EU treaty changes that prevent new EU financial watchdogs from overruling a country’s authority. Data just released has indicated a slowdown in annual producer price inflation and a narrowed trade deficit. Market trends are likely to be determined by the outcome of the meeting in Brussels and we expect high volatility today.

US Dollar – US Markets

The US Dollar is trading flat against the Pound and the Euro. It had traded higher against these currencies earlier in the day, amid news that leaders at the EU summit had failed to seal a unanimous accord. Additionally, there is the looming threat of a possible downgrade of the European sovereigns if the EU summit turns out to be inconclusive. Moreover, market speculation for additional easing in the US failed to receive much support as data indicated an improvement in the US job market. The US weekly jobless claims last week fell to the lowest level since February 2011. Additionally, the Reuters/Michigan consumer sentiment index, due for release later today, is expected to show an improvement for December. There is likely to be high uncertainty in trading today ahead of the outcome of the EU summit.

Euro – European Markets

Failure to secure a unanimous accord over changes in the EU treaty, coupled with the ECB’s reticence to act as a lender of last resort, have dragged the Euro below the 1.3300 mark against the US Dollar in early trade today. An agreement, announced some time back, to channel €200 billion into the IMF by European nations, has been hailed as a positive outcome by the ECB President Mario Draghi. The ECB dampened risk sentiment yesterday by stating that it does not have a legal mandate to rescue sovereign nations in trouble. The announcement of a 25 basis point rate reduction to the benchmark rate and an offer of long-term liquidity support to banks, failed to restore investor confidence. There are significant economic releases lined up for today in Europe, including the German CPI and trade balance, along with French industrial and manufacturing production. All eyes and ears, however, remain focused on Brussels.

Other Currencies – Highlights

The Aussie Dollar is trading lower against the majors, amid high uncertainty ahead of the outcome of the crucial Brussels summit. Additionally, comments made by the ECB President on bond purchases, negatively affected trading sentiment towards the high yield currencies. Data released this morning indicated a slowdown in the Chinese economy with November industrial output growing at the slowest pace in more than two years. Retail sales, however, were upbeat, while inflation came in lower than market expectations. The drop in inflation has stoked speculation that the Chinese central bank would resort to easing measures to boost growth.