Europe – Skating on thin ice

With a week full of surprises out of the way, including unexpected European Central Bank interest rate cut, debt-stricken Europe is expected to maintain its dominance on the markets’ attention in the week ahead. Traders risk appetite is likely to take direction from the multiple events lined up in the coming two days, including, a meeting of the European Finance Ministers, the selection of a new leader in Greece, at a meeting later today, to lead a new national government, and a crucial Parliamentary vote in Italy tomorrow. We continue to see Sterling as relatively better placed against the Euro, amid continuing uncertainty in the Eurozone. Meanwhile, the Pound’s further direction undoubtedly will likely be determined by the outcome of Bank of England’s (BoE) interest rate decision later in the week.

Pound Sterling – UK Markets

The Pound is trading weaker against the US Dollar, this morning, amid concerns over the future prospects of the British economy. Data released today indicates that Lloyds Banking Group’s employment confidence index fell to its lowest level in two years in October, while the Confederation of British Industry’s survey indicated a decline in sentiment among smaller manufacturers in the UK. Although economic indicators point towards further weakness in the UK economy, market participants are not expecting the BoE to alter its bond purchase plan and key interest rate, at its monetary policy meeting due on Thursday.

US Dollar – US Markets

The US Dollar has climbed higher against the Euro and Sterling, this morning, as political turmoil in Italy and Greece increased risk aversion amongst traders, and prompted them to move towards safe haven assets. Additionally, an inconclusive G20 summit dented demand for high yield assets. Meanwhile, the US non-farm data released on Friday showed that the nation’s unemployment rate dropped to 9% in October, from the level of 9.1% recorded in the previous month. Market speculation over further monetary accommodation seems to have eased, after San Francisco Federal Reserve Bank President, John Williams, stated on Friday, that the central bank should wait to see the outcome of its recent monetary easing moves, before taking any additional steps. With only consumer credit data on tap today, and a weak risk appetite, we expect the US Dollar to continue to trade firmer against the majors.

Euro – European Markets

Uncertainty over the outcome of Italy’s key Parliamentary vote tomorrow and a surge in Italy’s bond yields is weighing on the Euro against the major currencies this morning. Meanwhile, in a rare move, the debt-laden country has turned down an aid offer from the International Monetary Fund, but asked it to supervise the financial reforms being carried out. The initial euphoria surrounding reports that Greece is forming a coalition government seems to have fizzled out, with all eyes now set on the Greek leaders meeting, later today, wherein a new leader is expected to be named. Investors keenly await Eurozone’s retail sales, as well as German industrial production data. We expect the Euro to trade weak against Sterling and the US Dollar in the near term, on looming uncertainty over the political situation in Italy and Greece.

Other Currencies – Highlights

The Swiss Franc is trading weaker against the major counterparts, amid speculation that the Swiss National Bank (SNB) will act further to limit the strength of its currency. SNB President, Philipp Hildebrand, has indicated that the central bank is ready to take additional steps on the Swiss Franc if the risk of deflation increases in the economy. The inflation figures released today has further strengthened speculation that the central bank may re-adjust its cap in the near future, with the annual consumer price inflation declining in October. Meanwhile, the unemployment rate in Switzerland held steady at 3% in October, matching market estimates. We expect the Swiss Franc to weaken against the major currencies in the short term.