Litmus test ahead

After yesterday’s downbeat assessment of the UK economy by the Bank of England, and this morning’s weak Nationwide consumer confidence, the market was focused on retail sales data, which was surprisingly positive and has kept Sterling buoyant. Traders will now await results of Spanish and French bond sales, scheduled later today. News flow continues to suggest that the Eurozone contagion is spreading its tentacles as yields on government debt around the region continue to rise.The tone for risk appetite will be set by the perceived success of these auctions. With encouraging retail sales report in the UK, and uncertainty ahead of the crucial bond auctions in the Eurozone, Sterling is expected to trade higher against the Euro.

Pound Sterling – UK Markets

The Pound has advanced against the Euro this morning, after encouraging retail sales data. UK retail sales rose 0.6% in October from September, against market expectation for a drop of 0.2%. Earlier today, data from the Nationwide Building Society, indicated that the consumer confidence index in the UK dropped to the lowest level since May 2004, raising concern about the UK’s anemic economic situation. The Pound came under pressure against the majors yesterday, amid market speculation that the BoE would provide additional stimulus, after the central bank lowered its economic growth forecast. Moreover, BoE Governor, Sir Mervyn King, shrugged off inflationary concerns by stating that inflation will fall back to the 2% target next year.

US Dollar – US Markets

The US Dollar has strengthened against its major counterparts, this morning, as traders become increasingly risk averse, ahead of bond auctions in France and Spain later today. Market expects an increase in weekly initial jobless claims, a decline in housing starts, and an expansion in the Philadelphia Fed manufacturing index, in data scheduled to be released later today. The US Dollar will be volatile today and is expected to find direction from the Federal Reserve Bank of New York President, William Dudley’s speech, for any hint on the timing of an additional stimulus. In a speech last month, Dudley had stated that “it is possible that we could do another round of quantitative easing”.

Euro – European Markets

The Euro is trading lower against the US Dollar, as investors remain cautious, ahead of the French and Spanish bond auctions, to raise about €8.2 billion and €4 billion, respectively, scheduled for later today. The event has come under increased spotlight, as the yield levels for the French auction would help the market to determine the magnitude of the contagion effect of the European debt crisis. Mario Monti’s announcement that he would also serve as Italy’s finance minister while leading the new government, failed to inspire market confidence, as the yield tied to the country’s debt moved higher this morning. With Eurozone construction orders being the only major economic release on tap today, the currency is likely to take cues against the majors from the outcome of the bond auctions scheduled for today.

Other Currencies – Highlights

The Kiwi Dollar is trading lower against the US Dollar, this morning, amid growing uncertainties over the Spanish and French bond auction due later today. Data released today has indicated that input costs paid by New Zealand's manufacturers rose at the slowest pace in almost two years in the September quarter. Meanwhile, the output price inflation eased during the period, highlighting weakness in the New Zealand economy. The Kiwi Dollar is expected to find further direction against the majors today from the events unfolding in the Eurozone.