European see-saw continues

The most influential catalyst over the past 24 hours has been the warning from Germany and France that Greece would not receive the next tranche of aid unless it adheres to the terms of the bailout agreement agreed last week. Moreover, the admission by European officials that Greece’s exit from the Eurozone is a very real option has made matters worse. In the meantime, investors watch with interest if the recent developments encourage the new ECB President, Mario Draghi, to announce some additional measures, in the meeting scheduled for today, to offer some respite to the strained financial system. Market is expected to keep a keen eye on the developments in the Eurozone, along with the outcomes of the G20 and ECB meeting. We expect Sterling to benefit against the Euro in the near term, as the increasing uncertainty in the Eurozone will encourage investors to shift from the European assets to the relatively safer UK assets.

Pound Sterling – UK Markets

Concern over the growth prospects in the UK has continued to weigh on the Pound against the US Dollar this morning. The National Institute for Economic and Social Research (NIESR) has indicated that there is a 50% chance that the British economy will slip back into recession. The agency further added that the recent poor performance has been driven by weak domestic demand, rather than developments in the Euro area, and that it does not expect the UK economy to return to pre-recession peak until the end of 2013. Meanwhile, services Purchasing Managers Index data slated for release today is expected to indicate a decline in October. We expect the Pound to trade higher against the Euro in the near term, and take further direction from the events unfolding in the Eurozone and the outcome of the crucial G20 meeting.

US Dollar – US Markets

The US Dollar has climbed against the Euro and Sterling, this morning, as the ongoing uncertainty in the Eurozone has caused increased risk aversion amongst investors. Yesterday’s Federal Reserve’s policy meeting ended without any dramatic shift in the policy, an outcome that was widely expected by market participants. European leaders’ comments that they would withhold the Greek aid, and possibility of Greece exiting the bloc, pose a serious threat to the already dire European debt crisis situation. On the other hand, NIESR has cautioned that there is a 50% chance of the British economy slipping into recession. Disappointing global news flow is likely to encourage investors to favour exposure to the US Dollar, as against Sterling and the Euro. Key economic indicators taking center stage today include factory orders, initial jobless claims, non-farm productivity and unit labour costs.

Euro – European Markets

Looming possibility of the exit of Greece from the Eurozone, ahead of the outcome of the G-20 meeting, has led the Euro lower against most majors, this morning. European leaders have indicated that Greece would vote next month to determine whether it would stay in the single currency bloc. German Chancellor, French President and the IMF have all warned that the country would not receive the next tranche of aid, if it fails to adhere to the terms of the bailout agreement. Additionally, weighing on the currency is the ECB’s rate setting meeting, scheduled today, where the central bank is largely speculated to consider additional monetary. With no other key economic release scheduled for release today, the Euro is expected to trade weaker against Sterling in the short term, amid escalating worries in the Eurozone and its movement would find further cues from the outcome of the G20 meeting.

Other Currencies – Highlights

The Australian Dollar is trading lower against the US Dollar, this morning, on the back of downbeat economic data in Australia, and a drop in risk appetite amongst traders. Data indicated that Australian services sector contracted in October, while retail sales growth slowed in September. Worrying news flows from Europe, coupled with weak Asian and European equity markets today, has increased risk aversion amongst traders, prompting them to shift from the Australian Dollar to safe haven currencies. Additionally, the not so encouraging Chinese reports on services and manufacturing Purchasing Managers’ Index, and the volatility in the commodities market has also weighed on the Australian Dollar. We expect Aussie to remain weak against the USD in the near term.