Sterling to track Retail Sales, Eurozone Developments

The Bank of England’s (BoE) policy meeting minutes released yesterday suggest that policymakers see higher risk to the UK economy, and the move to increase bond purchases from £200 billion to £275 billion was unanimous. The euphoria surrounding the outcome of the European Union (EU) summit on 23 October 2011 seems to have ebbed a little, as European policymakers, at a meeting in Frankfurt yesterday, failed to resolve differences on measures to contain the sovereign debt crisis. Meanwhile, the Standard & Poor’s (S&P) cut its long and short-term sovereign credit ratings on Slovenia, while Moody’s downgraded some Spanish regions. For today, the direction of Sterling against the Euro is anticipated to be driven by the release of the UK retail sales data, which is expected to be largely positive. In the near term, Sterling is expected to take cues against the Euro, from events unfolding in the Eurozone.

Pound Sterling – UK Markets

The Pound traded weaker against the US Dollar, this morning, amid market speculation that the BoE would undertake further measures to boost the country’s growth. The BoE minutes revealed that the central bank policymakers discussed raising the asset purchase target to as much as £300 billion, before unanimously agreeing to raise it by £75 billion to £275 billion. Additionally, policy makers believe that the rate of inflation will fall back sharply from its current elevated level, in 2012. Growth concerns continue to persist in the UK, with the Business Secretary, Vince Cable, indicating that the conditions in the domestic economy “are very difficult”. Markets will be closely watching UK September retail sales data, slated for release later today, which is expected to show an improvement. We believe that news flows from the Eurozone and the UK retail sales data would determine the direction of Sterling against the Euro in the near term.

US Dollar – US Markets

The disagreement between European leaders over a solution to the European debt crisis has led investor risk appetite to wane, resulting in the strengthening of the US Dollar against Sterling and the Euro, this morning. Atlanta Federal Reserve (Fed) Bank President, Dennis Lockhart’s positive comments that the US economy may be accelerating to a modest pace of growth and that inflation may fall, has spurred speculation that the Fed might not resort to another round of monetary easing, thus driving the US Dollar higher. Additionally, upbeat US Housing starts data for September has calmed market worries about the current state of the US economy. The US Dollar is likely to gain against Sterling and the Euro in the near term. Traders would be looking for economic releases including existing home sales, leading indicators index and Philadelphia Fed manufacturing survey, all scheduled for release later today.

Euro – European Markets

The Euro has suffered losses against the major currencies, this morning, amid news of discord amongst European leaders over a plan for resolving the Eurozone debt crisis, fuelling uncertainty over the outcome of the EU summit scheduled on 23 October 2011. French President, Nicolas Sarkozy, yesterday stated that plans to tackle the Eurozone debt crisis have stalled. Meanwhile, Moody’s Investors Service has downgraded Spain’s region of Castilla-La Mancha by five levels to junk, and also downgraded nine other regions, citing their deteriorating finances. We expect the Euro to weaken against the US Dollar in the short term, as a concrete and comprehensive plan to deal with the debt crisis in the EU summit seems doubtful in the near term. Economic data taking centre stage today includes German Producer Price Index and Eurozone consumer confidence index. Moreover, market is keeping an eye on debt auctions in France and Spain later today, to gauge the risk appetite of investors for Eurozone debt.

Other Currencies – Highlights

The Yen has gained against the major currencies, this morning, following a drop in risk appetite amongst traders. Market has responded to concerns about the UK and Eurozone economies by demonstrating preference for safer assets such as the Yen. The decline in Asian equity markets and a weak start to the European equity session has further cemented gains in the Yen. Meanwhile, Bank of Japan Governor, Masaaki Shirakawa, has indicated that the Japanese banking system remained stable and healthy. We expect the Yen to trade higher against Sterling and the Euro in the near term.