Yesterday, the failure to generate enough demand for the full amount of German government bonds shook investor confidence. This was despite better than expected German market confidence data released earlier in the day. Meanwhile, BoE minutes showing a unanimous vote to hold quantitative easing at its current levels, saw Sterling rally slightly on Wednesday. Relevant economic releases today include UK & German GDP, and UK Total Business Investment.
Over the past few weeks, the Eurozone debt crisis has moved beyond peripheral countries and investor concerns have now shifted to Spain, Italy and France. Moreover, major economic indicators are pointing to a strong possibility of a recession in Europe
Pound Sterling – UK Markets
Speculation over further easing in the near future has faded, after minutes of Bank of England’s latest monetary policy meeting indicated that inflation remains "materially above target." The minutes further indicated that the central bank’s forecast of inflation falling below the 2% target rate might not materialize within the next two years.
The central bank also indicated that it would take "a further three months" to complete the latest £75 billion installment of asset purchases and that the market did not currently have the capacity to absorb any more.
Data slated for release today is expected to indicate that service sector growth in the UK remained flat in September. We expect Sterling to take cues from the series of economic releases in the UK and in Europe today.
US Dollar – US Markets
The US Dollar is trading lower against the majors this morning. Yesterday the currency climbed as rising European bond yields and a disappointing German bond auction spooked markets and prompted investors to move towards the currency as a safe haven.
However, in a significant development, Moody's Investors Service has cautioned that the failure of a US congressional committee to reach an agreement on deficit reduction would not affect the “AAA” rating, but any withdrawal from agreed automatic cuts to take effect starting in 2013 could prompt it to take action.
On the economic front, data yesterday indicated a decline in the durable goods order for the second consecutive month, painting a weak picture of the US economy. With no significant economic releases scheduled for today, the US Dollar is likely to be take cues from developments in the Eurozone.
Euro – European Markets
The Euro has strengthened against the majors after the, just released; German business confidence data indicated an unexpected rise in November, for the first time in five months. Moreover, some reports have suggested that German support for the issuance of joint Eurozone bonds is no longer being categorically ruled out in Chancellor Angela Merkel's coalition.
Yesterday, the currency saw increased selling pressure after the poor German bond auction heightened contagion fears. 10-year German bond yields surged posting the biggest jump since 1990. European Central Bank Governing Council member, Ewald Nowotny, warned that Germany’s difficulty in getting bids for its debt auction is an “alarm”.
Investors are keenly eyeing the Italian bill auction worth €8.0 billion scheduled for tomorrow. We expect the Euro to trade higher against the majors today.
Other Currencies – Highlights
Risk aversion eased pushing the Aussie Dollar higher against the majors, after data indicated an unexpected increase in German business confidence for November. The better-than-expected business confidence data boosted the demand for high yielding assets.
Meanwhile, recovery in equity markets across Asia and Europe strengthened the demand for the Aussie Dollar. The Dow Futures is trading sharply higher as compared to yesterday’s lows, thereby providing signals that market risk appetite has improved.
Moreover, the recent steep fall in the Chinese manufacturing PMI has strengthened speculation that the Chinese central bank would take steps to ease its monetary stance.