Market optimism that European policymakers are taking measures to insulate banks from the region’s debt crisis seem to outweigh Moody's Investors Service downgrade of debt ratings of twelve UK financial institutions.
Yesterday, officials in the UK and Europe initiated steps to address the current economic crisis. The Bank of England (BoE) made this clear after unexpectedly increasing its asset purchase target by £75 billion, while the European Central Bank (ECB) announced the renewal of its covered bonds program. We expect the Euro and Sterling to remain volatile against the US Dollar, in the near term, until there is a visible impact of efforts undertaken by the European officials to address the debt crisis.
In today’s session, the talk will undoubtedly be dominated by the run up to this month’s US non-farm payroll release.
Pound Sterling – UK Markets
Sterling is trading higher against the US Dollar, as indications of a possible banking sector recapitalisation in Eurozone boosted demand for high yield currencies, even as Moody’s downgraded 12 UK financial institutions.
The currency was under pressure against the US Dollar, yesterday, after the BoE expanded its asset purchase target by £75 billion, as against market expectation of a £50.0 billion increase. The policy makers also voted to keep the interest rate on hold at 0.50 percent. The only economic indicator on tap today, is the Producer Price Index, which is expected to show an increase on an annual basis.
We expect Sterling to trade higher against the Euro, in volatile trade ahead of release of key US economic data.
US Dollar – US Markets
The US Dollar is trading under pressure today, amid improved risk appetite amongst investors following talks of bank recapitalization plans. The currency was trading mixed during the initial trading hours, as investors remain focused on the US non-farm payroll report scheduled later today.
The recent bearish tone of the Fed Chairman, Ben Bernanke, about further monetary measures to support growth, is weighing on the US Dollar. Adding to the woes is the US unemployment rate which has remained stubbornly high at over 9%.
We expect the US Dollar trade weak in today’s trading.
Euro – European Markets
The Euro has gained against the US Dollar, this morning, as the ECB took steps to provide impetus to the region’s economy. Measures included reintroduction of year long loans, giving banks access to unlimited cash through January 2013, and resumption of purchases of covered bonds.
Moreover, expectations have grown that European policymakers would take steps to insulate the region’s banks from the impact of a possible Greek default.
We expect the Euro to be volatile against the US Dollar in the near future, given the economic uncertainties. The currency is likely to seek direction from the release of US payroll data later today and the weekend meeting of German Chancellor, Angela Merkel, and French President, Nicolas Sarkozy.
Markets also keenly await the release of German industrial production data later in the day.
Other Currencies – Highlights
The Aussie and the Kiwi are trading higher against the US Dollar, this morning, on easing concerns about the global economic situation.
Yesterday’s measures undertaken by the ECB and the BoE seems to have provided the necessary impetus to these currencies. The currencies have gained, following gains in Asian equity markets and amid speculation that European policy makers are moving to provide a cushion to banks from the region’s sovereign debt crisis. Market seems to have shrugged off the contraction in the Australian construction activity in September.
We expect that the renewed optimism amongst market participants about the European debt situation, would be positive for the Aussie against the US Dollar.