Cautious optimism in the air…

Markets were taken by surprise yesterday, after the European Central Bank (ECB) cut its key interest rate by 25 basis points to 1.25%, in a move indicating the central bank will focus on supporting growth, even in the face of elevated inflation in the region. There was positive news from Greece as well, with the country shelving plans for the referendum on financial bailout, diminishing prospects of the nation’s disorderly default. With the UK economic calendar on the light side, there is no doubt that today’s focus for the currency traders will be the crucial US non-farm payroll report, the confidence vote in the Greek Parliament and outcome of the crucial G20 meeting, all scheduled for today. We expect the currency markets to be volatile, in view of the uncertain outcome of crucial events lined up today.

Pound Sterling – UK Markets

There seems to be no immediate respite for the UK economy as data released yesterday indicated a slowdown in the UK service sector. Meanwhile, Deputy Governor of Bank of England (BoE), Charlie Bean, stated that the UK economy is likely to log a very moderate growth in the fourth quarter of 2011. Additionally, he shrugged off inflation concerns by stating that “inflation would have been more likely to undershoot rather than overshoot the 2% target in the medium term”. We believe that traders remain cautious, ahead of the BoE’s monetary policy meeting due next week. With no major economic releases slated for release today, we expect the Pound to be volatile against the Euro, and take further direction from the events unfolding in the Eurozone.

US Dollar – US Markets

The US Dollar is trading marginally higher against the Euro and Sterling, this morning, as the uncertainty around the Eurozone debt crisis has dented investors risk appetite somewhat, prompting them to move towards safe haven assets. There was some optimism about the economic reports in the US released yesterday which showed that US factory orders unexpectedly rebounded in September, while the weekly jobless claims fell more-than-expected last week. Today, the major economic data taking centre stage is the US is the non-farm payrolls report, which is expected to indicate that the nation’s jobs growth slowed and the unemployment rate remained unchanged, making matters trickier for the Federal Reserve. We expect the US Dollar to be volatile against the majors today, with further direction to be decided by the jobs report due later today.

Euro – European Markets

The Euro has been rangebound, against the majors, in trading this morning, as markets keenly await the confidence vote in Greece and the outcome of the G20 meeting. The ECB’s unexpected decision to lower its key benchmark rate, and downbeat comments from the ECB President, exerted pressure on the Euro against the US Dollar yesterday. However, the Euro managed to recover some of its losses, after the Greek Prime Minister, George Papandreou, indicated that he will not call for a referendum on the bailout plan agreed last week. Key economic releases on tap today include German factory orders and Eurozone’s producer price inflation, both expected to be largely positive. The Euro is expected to be volatile against Sterling and the US Dollar today, ahead of crucial events in the Eurozone.

Other Currencies – Highlights

The Yen has strengthened against the major currencies, this morning, amidst concerns over the global economic environment. Uncertainty surrounding the confidence vote in Greece scheduled for today, is prompting traders to move from high yield currencies to the Yen. Meanwhile, speculation of further quantitative easing in the US has provided strength to the Yen against the US Dollar, inspite of relatively good US economic data released yesterday. We expect the Yen to strengthen further from the current levels against the major currencies in the near term.