Festive Cheer for Markets

The key focus for today will undoubtedly be on the outcome of the ECB’s first tranche of unlimited three-year loan operations. Yesterday’s robust Spanish bond auctions and an unexpected improvement in the German business confidence index have helped to minimize market concerns. The high yield currencies are all trading higher today against the USD and the JPY, while at home today’s release of BoE minutes for its December meeting is unlikely to attract much market attention. We expect the current modest risk-on trading sentiment to be maintained in the run-up to the festive season.

Pound Sterling – UK Markets

The Pound is trading higher against the US Dollar, ahead of the release of the BoE minutes of its latest policy meeting. We expect the BoE to indicate a wait-and-watch approach for now, on the decision to expand its asset purchase programme. Meanwhile, Moody’s has warned that Britain faces increased challenges and that its credit rating is not completely immune to the European debt crisis. Adding to the woes, GfK NOP indicated that consumer confidence in the UK fell to the lowest level since February 2009. With Public Sector Net Borrowing and Public Sector Net Cash Requirement figures on the radar today, we expect the Pound to find direction against the Euro from the outcome of the ECB’s liquidity operations, which are likely to determine risk behaviour.

US Dollar – US Markets

The US Dollar has retreated against the majors as investors have found solace in the ECB’s attempt to improve financial sector liquidity through the three-year loan operations. Additionally, lower borrowing costs at the Spanish bill auctions and strong German business confidence have collectively allayed market concerns about short term Eurozone risks. Upbeat housing starts data in the US, released yesterday, also prompted traders to move towards riskier assets. In an attempt to prevent a financial meltdown, the US Federal Reserve has proposed that large U.S. banks should boost their capital reserves, in compliance with Basel III international standards and the Dodd-Frank financial reform law. Markets expect improved existing home sales later today, which is likely to cement optimism about the improvement in the housing market. We expect the US Dollar to trade weaker against the majors, as the newly found optimism among traders looks to be the trend for now.

Euro – European Markets

Optimism ahead of the outcome of the ECB’s allotment of the first tranche of its three-year loan programme, has aided the Euro to consolidate gains against the majors. Yesterday’s successful Spanish bill auctions and an unexpected improvement in German business confidence gave a much needed boost to the currency. Meanwhile, the Fitch warning over a possible downgrade of Italian, French and Spanish banks, as well as the European Financial Stability Facility, were taken in stride by the markets. We expect Eurozone consumer confidence, predicted to be largely negative, to be overshadowed by the euphoria surrounding the ECB operations to ease funding pressure in the financial system.

Other Currencies – Highlights

The Yen has weakened against Sterling and the Euro, amid receding demand for safe haven currencies. The sovereign debt concerns in the Eurozone have been relegated to the background for now, as the liquidity operations undertaken by the ECB are expected to ease the funding stress in the European financial system. In its policy meeting this morning, the Bank of Japan (BoJ), held its benchmark interest rate and the asset-buying fund unchanged. The BoJ lowered its assessment for the nation’s economy and indicated that global developments had led to a slump in exports and that production had remained “more or less flat”. On the economic front, data showed that the Japanese trade deficit widened more-than-expected for November. Amid a broadly positive trading sentiment today, we expect the Yen to move lower against the high yield currencies.