The Euro Takes a Pounding

Market sentiment towards the Euro has soured after all the major credit rating agencies cast doubts over the efficacy of EU measures to tackle the Eurozone debt crisis. Yesterday's relatively successful French and Italian debt auctions failed to inspire market confidence. Meanwhile, events taking center stage today include bill auctions for the European Financial Stability Facility, as well as for Greece, Spain and Belgium. Across the Atlantic, the Fed has its rate setting meeting today, the last for this year, where no major policy changes are expected. Back home, market participants cheered the unexpected improvement in UK housing data released this morning which, combined with figures reporting a fall in inflation from 5% to 4.8% for November, has helped Sterling to rally against the majors in the morning session.  

Pound Sterling – UK Markets

Sterling has traded robustly against the Euro this morning following positive housing and inflation numbers. The Royal Institution of Chartered Surveyors showed that UK's house price balance index rose unexpectedly for November, to the highest level since July 2010. Data just released shows that the nation’s consumer price inflation eased in November, as expected, thereby strengthening prospects for additional easing by the central bank in 2012. The Chances of inflation falling below the BoE's 2% target are low in the short term. The markets are keeping an eye on the retail price index for November, which is anticipated to show an increase. Pessimism surrounding the Euro and positive UK macro-economic data released today is likely to support Sterling against the Euro.

US Dollar – US Markets

The US Dollar is volatile against Sterling and the Euro this morning. Hogging the spotlight today is the FOMC rate setting meeting wherein the central bank is expected to keep its monetary policy widely unchanged. No further easing measures are expected, given the recent resilience of US economic data. However, three key Federal Reserve officials have called for more mortgage-bond purchases by the central bank. Markets expect the US Federal Reserve to adopt a "wait and watch" policy, with the next major decision likely in the first quarter of 2012. On the economic front, an upturn in November's US retail sales is anticipated later today, following the robust holiday shopping season.  We feel that the US Dollar is in a sweet spot and expect it to trade higher against the Euro and the Pound, amid waning risk appetite.  

Euro – European Markets

The Euro has witnessed high volatility against the US Dollar this morning. Traders remain wary over the near term solution to the region's debt crisis, with the initial euphoria that followed the EU summit dying down. Echoing market concerns, all the major rating agencies have issued bleak post summit analysis, raising fears of a mass Eurozone sovereign ratings downgrade in the first quarter of next year. Moreover, highlighting the fragile state of the European financial sector, Moody's have placed eight Spanish banks and two holding companies on review for possible downgrades. The direction of the Euro against the majors today is expected to be driven by the outcome of the EFSF's 91-day bills auction worth about €2 billion. Spain, Belgium and Greece too are scheduled to tap the debt markets for additional funding later in the day. Meanwhile, data slated for release today is expected to indicate that German investor confidence dropped to its lowest level since October 2008.  

Other Currencies – Highlights

The Yen has strengthened against its major counterparts amid concerns over global growth prospects. There are increasing fears that tighter budget deficit rules, agreed to at the EU summit last week, could impact global growth for some time to come. Moreover, warnings from rating agencies of possible credit rating cuts for European nations, have provided strength to the Yen. Japan's Finance Minister, Jun Azumi, has urged the EU to come out with more solid measures to stem the debt crisis. Supporting the case for safe haven assets, the OECD's composite leading indicators are pointing towards a slowdown in economic activity for all major economies. Meanwhile, there was some economic respite for Japan, with data indicating a rise in the nation's tertiary industry index for October.