No Clarity from the EU Summit

Markets were looking for some clarity from the weekend European Union (EU) summit on a number of issues, but in the end it appears that we have to wait until the next summit scheduled on Wednesday, before any details emerge. Details from the weekend meeting were scant on a number of issues including the recapitalisation of European banks and the size of haircut for Greek bondholders. Meanwhile, better-than-expected UK government’s September borrowing figures released on Friday and downward revision to the prior month’s figure have acted as a catalyst to boost the credibility of the nation’s austerity plan. However, the next few trading sessions should be volatile for Sterling against the major currencies, with direction being driven by the constant flow of headlines coming out of the Eurozone, as leaders try to reach a solution to resolve the crisis.

Pound Sterling – UK Markets

Sterling has strengthened against the US Dollar, this morning, following better-than-expected UK budget deficit data for September, released on Friday. Meanwhile, the UK Prime Minister, David Cameron, has indicated that the crisis in the Eurozone is not only having a “chilling effect” effect on the Eurozone economies, but on Britain as well. Further underlining the fragile state of the UK economy, the Construction Products Association has indicated that the construction industry in the UK is unlikely to grow until 2014. With no major UK economic releases slated for today, markets are expected to closely monitor the events unfolding in the Eurozone for further indications. We expect Sterling to trade weaker against the Euro in the near term, amid optimism that policymakers in the Eurozone would reach an agreement to resolve the region’s debt crisis at the EU meeting.

US Dollar – US Markets

The US Dollar has weakened against Sterling and the Euro, this morning, as an upbeat market sentiment ahead of the EU meeting scheduled on Wednesday, dented demand for safe haven assets. Market speculation over further quantitative easing by the Federal Reserve has received boost, after the Federal Reserve Vice Chairman, Janet Yellen, stated that a third round of purchases might become warranted to spur the US economy. Meanwhile, Bank of America Merrill Lynch forecasts that persistent deficit concerns could lead to US losing its AAA credit rating from another major rating agency by the end of this year. The key economic indicator for the week is the Gross Domestic Product data for the third quarter, slated for release on Thursday, which is expected to show an expansion. The US Dollar is expected to be volatile against Sterling and the Euro in the short term, in the run up to the EU summit slated on Wednesday.

Euro – European Markets

Cautious optimism over the EU policymakers moving towards curbing the region's debt crisis, has fuelled gains in the Euro against Sterling, this morning. Although no comprehensive solution has been reached, at the summit on Sunday, investors are hopeful that leaders would ultimately come up with concrete steps to resolve the Eurozone debt woes. Meanwhile, data just released, indicates that the German manufacturing sector activity declined in October, while the health of the factory sector in France improved unexpectedly in October. We anticipate that the Euro to trade volatile against Sterling and the US Dollar in the next few trading sessions, influenced by news flow around the summit on Wednesday.

Other Currencies – Highlights

The Yen is trading lower against Sterling, this morning, following gains in Asian equities and strong start to the European equity trading session. Moreover, positive Japanese exports and Chinese manufacturing Purchasing Managers Index data helped improve investor sentiment towards an improvement in the global economic conditions, thereby denting demand for the Yen as a safe haven currency. Meanwhile, Japanese Finance Minister, Jun Azumi, has stated that he will take “decisive” action on the Yen, if needed.