In his autumn statement yesterday George Osborne lowered the UK’s economic growth prospects for 2011 and 2012 to 0.9% and 0.7%, respectively. He also warned that Britain could easily slip back into a recession as a resultof the Eurozone crisis and that austerity measures would be extended beyond 2015.
Meanwhile, Eurozone finance ministers have agreed to extend the capacity of the European Financial Stability Fund (EFSF) and to release the sixth tranche of loans, worth €8 billion, to Greece by mid December. Additionally, it has been reported that ministers were informed, by way of a secret document that Italy was at risk of insolvency.
Luxembourg’s Prime Minister, Jean-Claude Juncker, stated that the Eurozone Finance Ministers have also agreed to work on boosting the resources of the International Monetary Fund (IMF).
Pound Sterling – UK Markets
Sterling is trading weaker against its major counterparts as growth concerns weighed heavily on the currency. While unveiling his lower growth forecast for the UK economy, George Osborne added that if Europe dipped into recession it would be “difficult” to avoid a recession in the UK. Additionally, the Chancellor announced plans to continue cutting public spending until 2017.
Meanwhile, on the employment front, the Office for Budget Responsibility (OBR) indicated that unemployment is expected to peak at 2.8 million in 2012.
Data released earlier today by GfK NOP indicated that confidence among British consumers increased marginally in November. Sterling is likely to continue to trade on cues from the Eurozone.
US Dollar – US Markets
The US Dollar managed to stage a recovery from yesterday’s fall as traders turned risk averse, amid looming uncertainty over the feasibility of the Eurozone’s rescue package. Meanwhile, renewed concerns began to mount after the ECB Governing council member, Christian Noyer stated that the situation in Europe had significantly worsened, further threatening global financial markets.
The Federal Reserve Vice Chairman, Janet Yellen, stated that the US Federal Reserve has room to spur US recovery and reduce unemployment by purchasing more assets. Meanwhile, data slated for release later today is expected to indicate a rise in private payrolls in October. Additionally, the Institute for Supply Management-Chicago is expected to reveal a marginal improvement in its business barometer for November.
Renewed concern over the turmoil in Europe is likely to continue to support the US Dollar.
Euro – European Markets
European Finance Ministers agreed late Tuesday on terms for two options to expand the capacity of the region's bailout fund. Under the first option bond holders would get partial risk protection of 20%-30% backed by the EFSF. Under the second option co-investment funds would be created allowing for the combination of public and private funding for purchasing Government bonds.
However, the Euro is trading lower against the US Dollar as doubts over the potential of the Eurozone’s rescue fund continue to persist with markets awaiting further action from policymakers on plans to tackle the region’s debt crisis. Additionally, markets were faced with fresh concerns over Italy.
A monthly decline in German retail sales in October has also dampened investor sentiment. While data on theGerman employment rate and Eurozone consumer price inflation is awaited, the currency’s movement is expected to take cues from further developments in the Eurozone.
Other Currencies – Highlights
The Japanese Yen is trading higher against the Euro and Sterling amid looming uncertainty over the details of the Eurozone’s rescue fund. The safe haven currency strengthened against the majors amid speculation that Europe’s effort to expand its bailout fund to €1 trillion is not enough to address the crisis. Luxembourg Finance Minister, Luc Frieden, indicated that the plan to expand the EFSF’s firepower to €1 trillion with leveraging will be “very difficult to reach.”
Earlier today data indicated a better-than-expected increase in Japanese industrial output for October. Additionally, housing starts recorded a lower-than-expected drop in October.
Meanwhile, Bank of Japan Deputy Governor, Kiyohiko Nishimura, indicated that the sharp appreciation of the Yen may lead to an increase in the shift of production overseas by Japanese firms.
Sterling Rises on Hopes of EU Softening Tone on Backstop