#Merkel Mires Markets
Lack of consensus among top Eurozone leaders on how to resolve the debt crisis, continues to take its toll on the Euro after the German Chancellor, Angela Merkel, rejected the idea of a higher limit for the European Stability Mechanism (ESM). A silver lining to yesterday's cloud came in the form of successful auctions of Spanish, Belgian and EFSF bonds at lower borrowing costs, combined with encouraging UK inflation and house price data. With the Pound to Euro rate at its highest level since February now is a great time to contact your dealer for a great rate on buying Euros.
Pound Sterling – UK Markets
Sterling is trading higher against the Euro this morning. The claimant count rate has registered an unchanged reading for November, while the ILO unemployment rate remained stable for October. The rejection of Angela Merkel's suggestion to raise the funding limit of Europe's future bailout fund, has led Sterling to consolidate its gains against the Euro. Yesterday, the Pound had climbed higher against the Euro, on the back of positive domestic housing and inflation data. The easing inflation figure has vindicated the BoE's view that an elevated level of inflation is a temporary phenomenon. We expect Sterling to trade stronger against the Euro today as concerns over the debt crisis in the Eurozone outweigh fears of a likely recession in the UK.
US Dollar – US Markets
The US Dollar has strengthened against Sterling and the Euro this morning, amid concerns that a decisive solution to the region's debt crisis seems elusive. Adding to the attractiveness of the US Dollar is the uncertainty surrounding the possible downgrade of major Eurozone economies by rating agencies. The currency has held on to its previous session gains. Yesterday, the Federal Reserve stated that the U.S. economy is expanding and refrained from further easing measures. Meanwhile, lower-than-expected growth in retail sales for November failed to have a meaningful impact on the US Dollar. Among economic releases scheduled for today is the import price index for November, which is expected to indicate a monthly expansion. We expect the US Dollar to trade higher against the majors today, on persistent concerns over the Eurozone debt crisis.
Euro – European Markets
The Euro is hovering close to the 1.3000 mark against the US Dollar after Angela Merkel confirmed that a €500 billion cap on the planned ESM, will stay in place. The pair has been trading above the 1.3000 level since January 2011. This morning the Ifo institute slashed its 2012 economic growth forecast for Germany to 0.4% from 2.3%. Any further negative news flows during the course of the day may force the pair to retest these levels. Additionally, an IMF report on the ineffectiveness of Greek structural reforms has fuelled fears over the contagion effect of the crisis. Pessimism surrounding the Eurozone debt crisis is clearly evident after an unexpected improvement in German economic sentiment, yesterday, failed to restore confidence in the Euro. However, market concerns over the outcome of today's Italian and German bond auctions, worth a combined €8 billion, have eased following the positive response to yesterday's Spanish debt auction. Markets will be eyeing the Eurozone industrial production report scheduled for release later today.
Other Currencies – Highlights
The Australian Dollar has weakened against the US Dollar after the Deputy Governor of the Reserve Bank of Australia, Ric Battellino, warned that the nation's economy would inevitably suffer spillover effects from the European debt crisis. Data indicating a sharp decline in Australian consumer confidence for December also weighed heavily on the currency. The Conference Board's warning that the Chinese economy faces the risk of a "substantive slowdown", coupled with a downward revision to Japanese industrial output for October, has further affected sentiment towards the currency. The Australian Dollar is expected to trade lower against the majors today, amid continued risk aversion.
Sterling Rises on Hopes of EU Softening Tone on Backstop