Europe Epidemic

The situation in the Eurozone seems to be worsening by the day. After the weak Italian bond auction on Monday, yesterday’s rising French, Spanish, Belgian and Austrian bond yields have sparked market concern over the contagion effect of theEuropean debt crisis. The outcome of tomorrow’s keenly awaited French and Spanish bond auction will give further indication on the severity of the epidemic. Traders are also keenly awaiting the Bank of England’s (BoE) quarterly inflation report, scheduled for release later today, wherein the central bank is expected to downgrade its’ economic growth outlook. The rising concern over the Eurozone sovereign debt situation has placed Sterling at an advantage against the Euro.

Pound Sterling – UK Markets

The Pound is weaker against the US Dollar this morning, after the BoE Governor, Mervyn King, stated that inflation will decline “sharply” in the next six months, strengthening market perception that the central bank may resort to additional easing measures. Market participants expect the BoE to provide a gloomy update on the state of the UK economy, anticipating that it would lower the 2011 and 2012 economic growth forecast, providing a boost to market speculation of another round of asset purchases. Meanwhile, the UK ILO unemployment rate grew to 8.3% in the three months to September 2011, higher that the expected level of 8.2%.

US Dollar – US Markets

Growing risk aversion on persistent Eurozone debt woes has boosted demand for the US Dollar against the majors. Investors are treading cautiously amid uncertainty over the potential of the newly appointed leaders in Italy and Greece to push through severe austerity measures and resolve the respective nation’s debt problems. Data released yesterday indicated better-than-expected retail sales and an improvement in the New York region’s manufacturing activity, allaying market speculation over further Fed stimulus. Echoing this sentiment, Dallas Fed President, Richard Fisher, stated that there is limited scope for further monetary policy easing. The major economic indicator in focus today is the US consumer price inflation report for October.

Euro – European Markets

The Euro is trading lower against the US Dollar, amid market anxiety over the French and Spanish debt auction scheduled for tomorrow. The sharp rise in yields of Italian, French, Spanish and Austrian sovereign bonds has renewed fears of increasedcontagion. Moreover, the political transition in Italy has come under increased scrutiny as the new Prime Minister, Mario Monti, is set to officially form his new government today. Market participants are keeping fingers crossed over his success in containing the region’s debt crisis. Traders await the Eurozone’s consumer price inflation report for October, scheduled for release today. We expect the currency to be volatile against the majors today, amid mounting concerns over the rising bond yields of the Eurozone sovereigns on the one hand and optimism surrounding new governments in Italy and Greece on the other hand.

Other Currencies – Highlights

The Yen has moved higher against Sterling and the Euro this morning, as signs of the worsening situation in the Eurozone, as evidenced by the rising borrowing costs in the region, prompted traders to shift from high yield currencies to the Yen. The Bank of Japan concluded its rate setting meeting today and , as expected, policy makers unanimously voted to keep the key interest rate unchanged, in the range of 0 to 0.1 percent. Additionally, the policy board left its asset-buying fund unchanged at ¥20 trillion. The central bank has warned that the economy will face an adverse effect from the slowdown in the global economy, the appreciation of the yen and the flooding in Thailand.