As we start an action-packed week, risk appetite has temporarily received a boost following encouraging manufacturing data from both the UK and China. Similar data is expected from the US later today.
However, uncertainties surrounding the global economy could sway market sentiment going forward. Besides key European monetary policy meetings later this week, the focus remains on the UK Chancellor’s Autumn statement on Wednesday, wherein he is likely to steer away from his projected path of fiscal consolidation. The risks arising from the US “fiscal cliff” negotiations and the state of affairs in Greece with the nation expected to present its bond buyback plan today, cannot be ruled out.
Pound Sterling – UK Markets
Sterling managed to hold its ground against the US Dollar this morning, as the latest manufacturing PMI reading from both the UK and China showed signs of recovery, easing worries surrounding the global economy. Moreover, the Lloyds business barometer in the UK continued to hover at a six month high, providing support to Sterling-US Dollar pair. With market participants awaiting a flurry of economic releases during the week, all eyes will hover around the Chancellor’s Autumn statement, wherein the Chancellor is fairly likely to miss his target – that debt as a proportion of GDP will be falling by 2015-2016.
On the monetary policy front, the BoE is likely to leave its monetary stance unchanged and is widely expected to pursue its “wait and watch” approach, as the MPC members remain reluctant for injecting fresh liquidity in the midst of rising inflationary pressures.
Today, markets will stay focused on developments from the Eurozone and the US for further direction. Additionally, the quarterly update on the Funding for Lending scheme later today is likely to shed some light on the credit off-take in the UK’s financial system.
US Dollar – US Markets
The US Dollar is trading lower against the Euro and Sterling in today’s trading session, as traders shunned safe haven currencies after the latest set of PMI readings from China offered more evidence of the nation staging an economic recovery.
However, prospects of negotiations between lawmakers faltering remain a legitimate threat, as both the Democrats and the Republicans appeared to have hardened their stance. The US Treasury Secretary, Timothy Geithner, indicated that tax hikes on the wealthy was non-negotiable, which remains the Achilles Heel in the budget talks. Market sentiment could also sway, as the focus once again shifts to debt laden Greece as the nation plans to unveil details of a bond buyback plan, a move required to unblock the aid payment.
Despite consumer confidence hovering at multi year highs, data released on Friday showed anaemic growth in US personal consumption expenses for October.
Among key releases today, the ISM manufacturing index is expected to shed light into the impact of the Hurricane Sandy on the nation’s manufacturing activity.
Euro – European Markets
Markets expect Greece to announce its debt buyback plan, a key parameter for unlocking the next aid payment. Against this backdrop, the Eurozone finance ministers are expected to hold their fourth meeting in four weeks in order to vet Greece’s planned response for the proposed buyback plan. However, the Euro seems to have shunned concerns about the peripheral economies higher against the US Dollar, following encouraging Chinese manufacturing PMI data. Additionally, the final manufacturing PMI readings confirmed the preliminary estimates in most of the Eurozone economies for November.
Meanwhile, Moody's slashed its top notch credit rating on the Eurozone rescue funds and maintained its “Negative” outlook, a widely expected repercussion of the latest downgrade of the French credit rating. However, the ECB Chief, Mario Draghi, pacified some concerns, as he indicated that the Eurozone would recover in the second half of 2013.
Apart from cues about the sovereign debt situation, markets are widely expected to keep an eye on the ECB’s monetary policy meeting in the latter half of the week.
Other Currencies – Highlights
The Aussie Dollar has declined against its major peers in today’s trading session after data showed Australian retail sales unexpectedly stagnated for October, reinforcing the belief that the Reserve Bank of Australia might cut the benchmark interest rate at tomorrow’s monetary policy meeting. Moreover, the Australian Industry Group revealed that the nation’s manufacturing sector contracted for the ninth consecutive month for November.
Traders are expected to tread cautiously ahead of the RBA’s monetary policy meeting, wherein the central bank is widely expected to lower its benchmark interest rate by 25 basis points to 3%. However, some positive signals emerged from China, as data showed that the Chinese manufacturing activity expanded for the first time in thirteen months for November.
Apart from the central bank’s interest rate decision tomorrow, traders are also expected to keep an eye on the Australian building approvals and current account balance figures for further direction to the Australian Dollar against the majors.
British Pound Suffers Losses Ahead of Tuesday's Critical Vote