All Eyes On Rome

Markets were negatively surprised yesterday after the ECB indicated that its balance sheet climbed to a record high on lending to Eurozone banks. This overshadowed the successful Italian short-term bond auctions. With Italy’s 10-year bond yields hovering at elevated levels it will be interesting to see the outcome of Italian longer tenor bond sales today. At home, with only Nationwide house prices data on tap today, Sterling’s direction against the majors will undoubtedly be determined by prevailing risk sentiment following these Italian bond auctions.

Pound Sterling – UK Markets

An uncertain domestic growth scenario, along with the ECB’s unexpected expansion of its balance sheet, is weighing heavily on Sterling against the US Dollar. Mixed economic releases towards the end of the year have fuelled concerns over the fragility of the British economy,heightening expectations that the BoE will resort to further easing measures in 2012. The only major release scheduled for today is the Nationwide House Price Index for December which is likely to highlight weakness in the British housing market.

US Dollar – US Markets

The US Dollar has strengthened against its major counterparts upon resurgent worries over the European debt crisis. Expansion in the ECB’s balance sheet and a subdued reaction to yesterday’s Italian bill auctions have added to apprehension in the market. Traders await the release of pending home sales data, initial jobless claims and the Chicago Purchasing Managers’ Index. With an otherwise lackluster trading session ahead, risk sentiment surrounding the outcome of the Italian bond auctions is expected to determine the direction of the US Dollar against the majors.

Euro – European Markets

The Euro is trading lower against the US Dollar after the ECB disclosed yesterday that its balance sheet had risen to a record high level of €2.73 trillion, on the back of a substantial rise in lending to the region’s banks. Yesterday’s Italian bill auctions witnessed a sharp decline in borrowing costs. Traders now await the critical €8.5 billion Italian longer-dated bond auctions, scheduled for today. Another noteworthy feature on today’s economic calendar is the preliminary reading on German consumer inflation, which is expected to ease on an annual basis. Data just released has indicated that the annual M3 money supply growth in the Eurozone, slowed in November. The Euro’s movement against the majors is likely to be range bound today and take direction from the outcome of the Italian bond auctions.

Other Currencies – Highlights

The Australian Dollar has weakened against the US Dollar as investors remain wary over the impact of the European sovereign debt crisis on global economic growth. These risks were earlier highlighted in the minutes of the December board meeting of the Reserve Bank of Australia. Mounting worries over the European debt crisis have sparked market speculation of further easing by the country’s central bank. Moreover, the upcoming Italian bond auctions have sapped risk appetite among traders, adversely affecting the high yield currencies, including the Aussie Dollar.