Europe – risk recedes but pain persists

In a major development, the Italian Prime Minister, Silvio Berlusconi, has offered to resign if the Parliament next week approves austerity measures promised to the Eurozone leaders. He had earlier failed to win an absolute majority in a routine Parliamentary ballot held yesterday. Market attention has now shifted to the second-day of the European Union finance leaders meeting, and Greece, where the new national unity government is struggling to name a new leader. Meanwhile, the rising Italian bond yields have impacted market sentiment adversely. With only trade balance data scheduled to be released today in the UK, which is not expected to have a remarkable impact on the movement of Sterling, we expect the Euro to trade lower against Sterling and the US Dollar, with direction being determined by new developments in the Eurozone.

Pound Sterling – UK Markets

Sterling is trading lower against the US Dollar, after Confederation of British Industry slashed its growth forecasts for the UK economy on the back of continued uncertainty in Eurozone, and urged the Chancellor to stick to current deficit reduction plans in his autumn statement. Earlier in the trading session, British Retail Consortium had stated that the shop price inflation slid to the weakest level since December 2010. Additionally, data slated for release later today is expected to indicate a widening of trade deficit in September. The Bank of England’s (BoE) monetary policy meet due tomorrow is expected to provide further direction to Sterling, with the BoE expected to maintain its benchmark interest rate and asset purchase program. We continue to expect Sterling to move higher against the Euro in the near term.

US Dollar – US Markets

The US Dollar has climbed against the Euro and Sterling, this morning, as fragile political situation in Greece and Italy coupled with downbeat industrial production and retail sales data in China has dampened risk appetite amongst investors. Meanwhile, President of the Federal Reserve Bank of Philadelphia, Charles Plosser, has raised questions about the effectiveness of the Fed’s monetary policy and indicated that it may not be the solution to the problems impacting the US economy. With a light economic calendar today, market seems to be keenly interested in Federal Reserve Chairman, Ben Bernanke’s speech scheduled for today, for any indication of additional quantitative easing in the near future. We expect the US Dollar to rise against the majors in the near term, amid growing risk aversion amongst traders.

Euro – European Markets

The Euro is trading weak against the US Dollar, this morning, as persistent political turmoil in Europe, soaring Italian bond yields and not so encouraging global economic scenario weighed on the currency. The Chairman of European Union, Jean-Claude Juncker, has stated that the European Central Bank would take part in monitoring Italy's promised economic reforms along with the European Commission and the International Monetary Fund (IMF). Moreover, dragging the Euro lower is an uncertain political scenario in Greece, with reports suggesting that a new Greek interim government may be announced later today. During the initial trading session, the currency had limited its losses, after the Italian Prime Minister, Silvio Berlusconi, yesterday, offered to quit. With no significant economic indicators slated for release today, the Euro is expected to trade lower against Sterling and the US Dollar in the short term.

Other Currencies – Highlights

The Japanese Yen is trading higher against the major currencies, this morning, as concern waned that the Bank of Japan will act further to weaken the currency. Moreover, growing political uncertainty in Greece and Italy has boosted demand for the Japanese Yen as a safe haven currency. Data indicating a more-than-expected slowdown in Chinese industrial output and retail sales growth in October has raised concern over the growth prospects of China, prompting investors to shift from high yield currencies to the Yen. Meanwhile, the outlook for the global economy has clouded, after the IMF Managing Director, Christine Lagarde, warned that the global economy has entered a "dangerous and uncertain phase" and a failure to act together at the current stage would push the global economy towards "a downward spiral of uncertainty”.