Optimism in the air

The sense of urgency in Europe to tackle the debt crisis was evident after German and French leaders concluded their weekend meeting and indicated that they had reached an agreement to strengthen European banks. Additionally, concerns about the troubled financial services group, Dexia SA, appear to have eased, after it indicated that it had accepted a rescue plan drawn up by the governments of France, Belgium and Luxembourg. The Belgian Federal government would pay €4 billion for the Belgian banking business of Dexia SA, and guarantee about 60 percent of a so-called bad bank to be set up for Dexia’s troubled assets. Continued expectations of recapitalisation of Eurozone banks could offer support to the Euro and lead it higher against Sterling and US Dollar in the next few trading sessions.

Pound Sterling – UK Markets

Sterling has gained against the US Dollar, this morning, amid growing optimism that the debt crisis in the Eurozone would be resolved. Sterling had also moved higher against the US Dollar on Friday, after a better-than-expected increase in US non-farm September payrolls. News of an agreement between the German Chancellor, Angela Merkel, and the French President, Nicolas Sarkozy, to recapitalise banks has added to Sterling gains against the US Dollar. Meanwhile, the Bank of England’s Monetary Policy Committee member, Martin Weale, has indicated that the central bank has a lot of scope for quantitative easing.

US Dollar – US Markets

The US Dollar has retreated against the Euro and Sterling, this morning, on increased optimism among investors. The weekend agreement between the French President and the German Chancellor has spurred speculation that Eurozone would be able to curb its debt crisis. We expect the US Dollar to trade lower against high yield currencies in the next few trading sessions, amid expectations of an improvement in Eurozone. With no major economic releases scheduled for release today, the movement in the US Dollar is expected to take cues from events in Eurozone.

Euro – European Markets

The Euro has gained composure against the US Dollar, after the French President and the German Chancellor pledged over a weekend meeting, to undertake concrete plans to address Greece’s immediate difficulties and structural defects in the Eurozone. Supporting the gains in the Euro were reports that Dexia SA had agreed to accept the rescue plan by Belgium, France and Luxembourg, and an unexpected increase in French industrial output in August. We expect the Euro to strengthen against Sterling and the US Dollar in the near term, as concerns about the European debt crisis seem to have eased. On Friday, the Euro had moved southwards against the major currencies, amid a series of credit rating downgrades. Fitch Ratings lowered Italian and Spanish debt ratings, and put Portugal's debt rating on watch for a possible downgrade. Moreover, Moody's Investors Service indicated that it might downgrade Belgium’s sovereign rating.

Other Currencies – Highlights

The Aussie has strengthened against the US Dollar, this morning, amid growing optimism that the global economy is recovering. Encouraging September non-farm payrolls data from the US on Friday, and an unexpected increase in the French industrial output for August has eased market concerns about the global economic situation. We expect the Aussie to gain against the US dollar in the near term, as the Australian employment figure due later this week is expected to indicate that employers in Australia added jobs in September, following job losses in August.