Market is closely watching the events unfolding in the Eurozone. There was pessimism towards the Euro overnight, after Slovakia's Parliament rejected a plan to overhaul the Eurozone's EFSF rescue fund. The US Treasury Secretary, Timothy Geithner, also cautioned European lawmakers, stating that European leaders must go beyond the planned recapitalisation of banks to resolve the region’s debt crisis.
However, this morning, optimism returned towards high yielding currencies, such as the Euro and the Pound, after the Eurogroup President, Jean-Claude Juncker, proposed steps to solve the Eurozone debt crisis. These include automatic sanctions for fiscally irresponsible governments, greater authority for the Commission and a dividend for taxpayers who rescue banks.
Additionally, the European Commission President, Jose Barroso, is expected to present proposals for the recapitalisation of Eurozone banks later today.
Pound Sterling – UK Markets
Though market participants expected the Sterling to be under pressure, ahead of expectations of an increase in UK unemployment claims for the seventh consecutive month in August, the Pound has rebounded sharply this morning to eke out modest gains against the US Dollar. It has, in a way, shrugged off yesterday’s downbeat report on UK manufacturing output and NIESR’s gloomy outlook of the British economy in the second quarter.
NIESR had cautioned yesterday that the recovery in the UK is "slowest of any since First World War'’, strengthening speculation over further quantitative easing measures by the Bank of England (BoE) in the near term. Echoing the sentiment, the BoE policy maker, Adam Posen, stated that the central bank is prepared to add another round of stimulus, if required.
Sterling is expected to trade on cues from updates from the Eurozone.
US Dollar – US Markets
The US Dollar has lost ground this morning, after the Eurogroup President, Jean-Claude Juncker, proposed steps to solve the Eurozone debt crisis. We expect the Dollar to lose ground today, as expectations rise for more positive action from European leaders to resolve the region’s debt crisis.
The US Dollar had advanced earlier after the US Senate passed a bill, targeted at China, which enables the US government to introduce tariffs on products from countries suspected to be subsidizing their exports by undervaluing their currency. However, China has called on the US government not to use legislation to push for changes in exchange-rate policies.
With no major data releases today, traders are keeping a tap on the Federal Reserve’s minutes of its latest meeting, specifically eyeing hints of further quantitative easing measures.
Euro – European Markets
The Euro advanced against the US Dollar, after the German Chancellor, Angela Merkel, stated that there would be full ratification of the European Financial Stability Fund (EFSF), by the time of the European Union summit on 23 October 2011. Earlier the Euro had dropped after the Slovak Parliament rejected the plan to expand the Eurozone rescue fund. The Euro was boosted further this morning, as markets welcomed the proposals of Eurogroup President, Jean Claude Juncker, for the solution to the Eurozone’s debt crisis.
Markets also shrugged off the European Union, International Monetary Fund, and European Central Bank’s cautious review on the attainability of Greece’s 2011 fiscal target, sparked massive sell-offs in the currency.
Other Currencies – Highlights
Yen has reversed most of yesterday’s gains, ahead of the Eurozone industrial production data due later today. Market will be closely watching the minutes of the latest FOMC meeting that is slated to release later today.
Recent economic news flows indicate a revival in the Japanese economy. Data indicated a sharp rise in Japanese core machine orders for August. Meanwhile, yesterday, Bank of Japan, in its monthly economic report, indicated that the Japanese economic activity is picking up and it expects the country to return to a moderate recovery path.
British Pound Suffers Losses Ahead of Tuesday's Critical Vote