As we reach the end of a tumultuous year there seems to be a lack of conviction among traders regarding the direction of the major currency pairs. Hogging the spotlight today are the Italian bond auctions, which are expected to determine the direction of risk sentiment. With a sparse economic calendar and a lack of headlines from Europe the market has to wait for the festive season to end for any further meaningful cues.
We believe that “risk-off” trading sentiment will continue today.
Pound Sterling – UK Markets
The Pound is trading flat against the US Dollar and the Euro amid subdued trade.
A survey by Hometrack highlighting the fragile state of the UK housing sector, revealed yesterday that UK house prices will extend declines in 2012 due to rising unemployment and weak consumer confidence. Furthermore, yesterday’s surge in Italian bond yields heightened concerns over the European debt crisis and limited gains in high yield currencies against the US Dollar.
Earlier this week a Telegraph report suggested that; in an attempt to protect the British economy from the effects of a potential Euro region break-up, the British government was considering plans to restrict the flow of money in and out of the country.
With no significant economic release on tap today trading is likely to be calm.
US Dollar – US Markets
The US Dollar is trading almost unchanged against the Pound and the Euro.
Yesterday, data indicated a notable improvement in US consumer confidence and acceleration in the Richmond region’s manufacturing activity, signaling that economic recovery is gaining momentum. Data indicating a greater-than-expected decline in the S&P/Case-Shiller home price index was taken in stride by the markets.
With a light economic calendar today the currency is likely to track the outcome of Italian bill auctions.
Euro – European Markets
The Euro is trading flat against the US Dollar ahead of the outcome of a combined €11.5 billion in Italian bill auctions slated for today. Another Italian bond sale is scheduled for tomorrow.
Market expectation that the Italian consumer confidence report, scheduled tomorrow, is likely to be downbeat, has negatively affected trading sentiment towards the Euro. The Spanish Economic Minister’s warning, earlier this week, that the nation is likely to slip into a recession, has also affected sentiment.
We expect the Euro to trade in a narrow zone against the majors, in largely lackluster trading.
Other Currencies – Highlights
The Yen has gained against Sterling and the Euro this morning, amid muted risk appetite among traders.
A slew of economic releases today indicate an economic slowdown in Japan, with factory output declining at the fastest annual rate in the last six months and retail sales recording their weakest reading since March 2011. Moreover, headline national consumer price data reflected deepening deflation.
The US Treasury, in a bi-annual report yesterday, criticised Japan for its Yen-selling interventions in August and October 2011. However, Japan has reiterated that it would not change its stance of taking appropriate action in the foreign exchange market, as required.
Sterling Rises on Hopes of EU Softening Tone on Backstop