Greek crisis continues to dominate trading

The uncertainty over the extent of damage from a possible Greek default is expected to drive the Euro lower against the Sterling. Investors seem to be worried about the lack of clear leadership in resolving the crisis. Euro-zone finance ministers, after a meeting in Luxembourg, have indicated that Greece could wait until mid-November for receiving its next tranche of aid, and have further added that they are reviewing the size of the private sector's involvement in the second bailout package for Greece. We expect the persistent concerns and the lack of clarity of the outcome from Thursday’s European Central Bank meeting, to dominate trading over the next few sessions. In this scenario, the perceived safety of British assets vis-à-vis their European counterparts will continue to support the Sterling against the Euro, in our opinion..

Pound Sterling – UK Markets

The Sterling has declined against the US Dollar, this morning, amid speculation that the Bank of England might announce more quantitative easing measures as early as this week. While the Standard & Poor’s (S&P) has affirmed its “AAA” sovereign debt rating on the UK economy, it has cautioned that the nation’s economic recovery had been lacklustre, and that the government's austerity measures would weigh on growth. Further denting investor sentiment was the British Chancellor of the Exchequer, George Osborne’s indication that the British economy is not immune to the uncertainties and instability prevalent in the Eurozone. Additionally, we expect the Sterling to be under pressure against the US Dollar, ahead of a report scheduled for release today, which is expected to indicate a decline in construction sector activity in Britain. Yesterday, the Sterling ended lower against the US Dollar, as investors shrugged off better-than-expected manufacturing report in the UK.

US Dollar – US Markets

The US Dollar has advanced against the major high yield currencies, this morning, as traders continue to remain risk averse. Yesterday’s better-than-expected report on the U.S. manufacturing activity has further supported gains in the US Dollar. Two Federal Reserve (Fed) officials have reiterated their opposition to further Fed monetary policy easing, and cautioned that it would do more harm than good. Their views came ahead of Ben Bernanke’s speech scheduled later today. With no other significant economic release scheduled for today, apart from factory orders, the US Dollar is likely to cement the gains of the previous few days.

Euro – European Markets

The Euro has declined against the US Dollar, this morning, on persistent concerns over the handling of the Greek debt crisis. Market speculation that the recent decline in the Euro was overdone had helped the currency to gain some momentum this morning. However, we remain skeptical that the Euro would be able to hold onto to gains and expect the Euro to trade lower, on market concerns over a near-term default by Greece. The meeting in Luxembourg has indicated that bondholders might have to take bigger losses on Greek debt, and the officials have agreed that Greece could wait until mid-November for the next tranche of the aid. Investors are eyeing Euro-zone retail sales report for August, scheduled for release tomorrow, which is expected to indicate a decline.

Other Currencies – Highlights

The Aussie has hit a one-year low against the US Dollar, after the Reserve Bank of Australia (RBA) kept its benchmark rate unchanged at 4.75 percent. RBA also hinted that it was open to lowering the interest rate, if inflation pressures ease. The Aussie, whose fortunes are closely linked to commodities, is expected to maintain its southward journey, amid mounting concerns over global economic growth. Meanwhile, the JPY is trading marginally lower against the Euro. Japanese Finance Minister, Jun Azumi, has cautioned that Euro’s weakness against the JPY is “extreme” and is not good for the stability of the global economy.