The initial euphoria surrounding the formation of new governments in Italy and Greece has been short lived. Italian yields rose at an auction yesterday, showing that traders remain cautious about any near term solution to the regions’ debt crisis. In some better news, the annual inflation rate in the UK declined to stand at 5% in October, as against market expectation for a reading of 5.1%; however continuing to remain high compared to the Bank of England’s comfort level.
With a docket of European economic data in focus today, ensure that you talk to your dealer for further updates.
We believe that Sterling is better placed against the Euro, with the pair likely to find further direction from the slew of economic reports scheduled for release later today.
Pound Sterling – UK Markets
Sterling is trading weaker against the US Dollar after the release of inflation data indicated lower than expected rates. The annual inflation rate declined to 5% in October, against expectations of a fall to 5.1%, compared to the previous month’s level of 5.2%.
Markets are expected to closely follow Bank of England Governor, Mervyn King’s speech tomorrow, after the central bank publishes its quarterly Inflation Report and new economic projections.
Meanwhile, UBS has warned that Britain will lose the "safe-haven" status it has enjoyed this year, as improving US economic growth proves a bigger attraction to investors.
Yesterday, the UK Prime Minister, David Cameron, stated that the European Union would be in “peril” unless policymakers utilize the “opportunity” presented by the crisis to reform the institution.
US Dollar – US Markets
The US Dollar has strengthened against the majors this morning due to higher risk aversion amongst traders, following the increase in Italian and Spanish government bond yields yesterday, and weak Asian and European equity markets today.
Additionally, speculation over further easing in the US took a backseat, after the Federal Reserve Bank of Dallas President, Richard Fisher, stated that the US economy was “poised for growth” going into 2012, adding that there was a lower possibility of the central bank resorting to further easing.
On the economic front traders are keeping a close watch on October retail sales data, which is expected to indicate a slowdown. A separate report is expected to indicate that US producer prices declined in October, the first drop since June 2011.
We expect the US Dollar to move higher against Sterling and the Euro in the near term, on the back of persistent concerns in the Eurozone.
Euro – European Markets
Continuing stress in the European bond markets has dented risk appetite, leading the Euro lower against the US Dollar.
Spanish 10-year bond yields climbed above the 6% mark for the first time since August 2011, while Italian five-year bond auction witnessed substantially higher borrowing costs at the auction yesterday. Moreover, market uncertainty, ahead of the Spanish bond auction due on Thursday is also weighing on the Euro.
Adding to the agony, Wolfgang Schaeuble, the German Finance Minister, has stated that Europe’s permanent aid package may not be implemented before 2013.
A report scheduled for release later today is expected to show that German investor confidence index fell to a three-year low in November. Meanwhile, German and French Gross Domestic Product data for the third quarter, released this morning, came in line with market expectation.
Other Currencies – Highlights
The Australian Dollar is weaker against the majors, this morning, amid concern over the sovereign debt situation in the Euro zone.
Meanwhile, Reserve Bank of Australia’s minutes for its latest meeting indicated that the central bank had considered leaving its key interest rate unchanged. However, concern about global economic risks and slowing inflation supported the case for a “modest” easing at the last meeting.
We expect the Aussie Dollar to trade weaker against the majors today.
Dollar Weakens as Fed Turns Dovish, Eyes on BoE
Euro Plummets as Draghi Opens Door For Rate Cuts
British Pound Stays Under Pressure Ahead of Tuesday's Vote