Increased Italian borrowing costs and high levels of lending to Spanish banks by the ECB in November have highlighted the growing funding stresses in Europe and stoked concern that the region is losing its fight to contain the debt crisis.
A positive week’s economic releases in the UK coupled with continued contraction in manufacturing activity across the Eurozone, has seen further strengthening of the Pound against the Euro this morning.
Pound Sterling – UK Markets
The pound soared against the Euro this morning reflecting better-than-expected jobless claims data yesterday. This followed the week’s positive housing and inflation data which have rekindled hopes that the UK economy might bounce back.
However, optimism surrounding upbeat economic releases was offset after David Cameron opined that there were no signs of a return of the “feel good factor”. Furthermore, fears of a recession intensified after the Centre for Economics and Business Research warned that the UK would struggle to avoid a double-dip recession next year.
The day ahead will see significant economic releases including retail sales figures for November and the combined BoE/GfK inflation outlook for the next 12 months, which are expected to provide direction to trading today.
US Dollar – US Markets
Trade in the US Dollar is steady against the pound this morning while it continues its gains against the Euro. Fears that the US may face an imminent government shutdown over the tax and spending tussle between Republican and Democratic lawmakers, have kept traders on edge.
However, economic data slated for release today is expected to be largely positive and anticipated to ease deflationary concerns. Producer price inflation is expected to register growth for November, while manufacturing activity in the New York and Philadelphia regions is expected to reveal an improvement for December.
The US Dollar is expected to take further cues against the majors from the outcome of the Spanish debt auction and the slew of US economic releases due later today.
Euro – European Markets
Yesterday, the Euro breached the 1.3000 mark against the US Dollar for the first time since January 2011, as sentiment towards the Euro was dented amid signs of increasing funding stress in Europe. Moreover, Bernanke’s comments that the Federal Reserve has no plans to bailout Europe also weighed on the Euro.
Markets are expected to closely monitor Spanish bond auctions due later today after borrowing costs for Italian five-year bonds rose in yesterday’s auction. Compounding the problem further, data showed that Spanish lenders’ borrowing from the ECB climbed in November to its highest level since June 2010. The ECB President, Mario Draghi, in his speech in Berlin today, is expected to reiterate his stand that the central bank’s bond buying program is “limited”.
Data just released has shown some improvement in the Eurozone, German and French manufacturing Purchasing Managers' Index for December but fears of a recession still persist, as the index remained below the 50 mark.
Other Currencies – Highlights
The Swiss Franc rallied against its major counterparts after the Swiss National Bank affirmed its exchange rate target of CHF 1.20 per Euro. The decision eased market speculation that the floor would be raised to a higher level to aid the Swiss economy to tackle deflationary pressures.
Markets, for the time being, seem to have ignored the SNB warning that the Swiss Franc is ‘still high’ and that it would resort to additional measures if required. Deflationary concerns continue to persist after the SNB indicated that it expects the country to record negative inflation rates in 2012.
Moreover, data revealed that industrial production declined more-than-expected in the third quarter. While maintaining its three-month Libor rate close to zero, the central bank indicated that it expects next year’s GDP growth to ease to 0.5% from this year’s expected growth range of 1.5% - 2%.