Today is a key day for markets, as European policy makers meet later to decide on the future course of action to solve the region’s debt crisis. A clear comprehensive solution could excite the markets, while anything short of expectations might be negative for high yield currencies against the safe havens. Volatility before the event is expected to be high, as there is little clarity on what the Eurozone leaders will come up with.
Growth concerns in the UK continue, with BBA Mortgage approvals falling in September. A positive update from the CBI Industrial Trends survey could soothe concerns over the health of the UK economy.
News flow from Italy has not been very encouraging. Reports indicate that Silvio Berlusconi's coalition government has moved closer to breaking up. German Chancellor, Angela Merkel, is expected to receive Parliamentary backing for her plan to leverage the Eurozone rescue fund’s firepower by offering government bond buyers insurance against possible losses.
Pound Sterling – UK Markets
Sterling is trading marginally lower against the Euro and we expect it to trade volatile, amidst uncertainty over the outcome of the EU summit.
Growth concerns in the UK persist, with mortgage approvals recording a disappointing fall. However, the current account deficit narrowed to £2.0 billion in Q2 2011.
Meanwhile, the Bank of England Governor, Sir Mervyn King, stated that the additional stimulus for the UK economy would not guarantee that the bank lending would increase, but added that the stimulus would ensure that the lending in the system would not decline.
On the inflation front, the Governor indicated that, had the central bank raised interest rate earlier, due to the rise in inflation, it would have pushed the economy “into a deeper recession”.
Sterling’s direction against the Euro in the near term is likely to be determined by the events unfolding in the Eurozone. Market will also be closely watching the CBI’s Industrial Trends survey data.
US Dollar – US Markets
The US Dollar is trading mixed against the majors this morning, amid uncertainty before the European Union summit due today. Market is witnessing a see-saw in risk appetite amongst investors in absence of any tangible direction towards the next step to resolve the debt crisis.
Markets are expecting a fall in durable goods orders for September, scheduled for release later today, led by a drop in the transportation sector. September new-home sales in the US are expected to remain flat. Yesterday’s data was not too optimistic, with consumer confidence declining sharply.
Meanwhile growth worries continue, with an urgent need felt for action. US Treasury Secretary, Timothy F. Geithner has indicated that economic growth in the US depends on whether Congress acts on the president’s jobs plan, stating that “growth will be stronger and unemployment will be lower” if Congress acts on the proposals.
Euro – European Markets
The Euro has been volatile against Sterling and the US Dollar, this morning. Uncertainty over the outcome of the European Union summit scheduled today, has contributed to increased volatility in the movement of the Euro. Markets across assets classes are keenly awaiting the solution to the problems in the region. Postponement of the meeting of European Union finance ministers ahead of a crucial second summit of European Union leaders, has added to the confusion.
According to Reuters, Brazilian Finance Minister has stated that Brazil was not considering buying European bonds to help ease Eurozone’s debt crisis, and instead called for Europe to find a solution to its problems within Europe. Meanwhile Luxembourg’s Prime Minister, Jean-Claude Juncker, stated that he wants the IMF to be involved to the maximum extent in the rescue plan.
With no major economic releases scheduled for release today, the Euro will take cues from the developments at the summit.
Other Currencies – Highlights
The Yen has gained against its key counterparts, ahead of the EU summit later in the day.
The Japanese Finance Minister, Jun Azumi, has reiterated that his ministry would take “decisive” actions to limit the gains in the Yen.
To mitigate the impact of the appreciating Yen, the Bank of Japan is expected to discuss further monetary easing in a meeting tomorrow and will most likely focus on an expansion of its asset-buying programme.
We expect volatility in trading, in line with the broader currency market.
Dismal Data and Sharp Fall in T-Bond Yields Hurt Dollar
Dollar Outperforms as Politics Continue to Weigh on European Currencies
UK PM May's "New Brexit Deal" Fails to Help Sterling