Yesterday’s Autumn statement by the UK Chancellor ran largely in line with the market script. He conceded that the recovery was taking longer than expected, owing to which the government would likely fail to meet its debt reduction target and consequently extend the cost cutting drive until 2018. On account of anaemic growth prospects, the OBR expects the British economy to register an annual contraction for 2012, elevating chances of the UK losing its “AAA” rating.
In the European monetary policy meetings later today, both the BoE and the ECB are expected to keep their powder dry. It would be interesting to see the reaction of the ECB President to the latest Greek downgrade by S&P.
Pound Sterling – UK Markets
Disappointing Spanish bond auction and weak Eurozone retail sales data led the Pound to stage a recovery against the Euro in yesterday’s session. However, the British Chancellor’s Autumn statement did little to have any meaningful impact on Sterling against the greenback. The Chancellor announced a surprise cut in corporation tax along with extra funds to build infrastructure, hinting that the UK government might miss its borrowing target in the near term. UK’s growth prospects also remain a concern, as the OBR expects 2012 economic growth to contract marginally, a sharp downward revision from a 0.8% growth projected in March 2012. Additionally, Fitch also reminded markets that the UK’s top notch credit rating could be at risk.
In today’s trading session, Sterling has continued to move upwards against the Euro after S&P lowered its credit rating on Greece. However, data just out has revealed that visible trade deficit in the UK widened for October. With the Chancellor passing the baton to the BoE for today’s session, markets expect the central bank to leave its monetary policy tools untouched but MPC members are expected to deliberate over the implication of the changing fiscal situation.
US Dollar – US Markets
The US Dollar has gained some ground against the Euro in today’s trading session, as Greece’s latest bond buy back programme earned no support from rating agencies and S&P lowering Greece's credit rating to "Selective Default".
Meanwhile, negotiations over the “fiscal cliff” issue continue to drag, as both parties offered no signs of softening their stance. With the deadline fast approaching, the US Treasury Secretary did not rule out the possibility of the US economy facing the brunt of lapsing fiscal stimulus and reaffirmed that a deal would not be reached without an agreement on higher tax rate on the wealthy. The US President also backed Geithner’s view of reaching a deal, if Republicans compromise on taxes.
Traders are expected to tread cautiously ahead of tomorrow’s non-farm payrolls figures, as ADP’s data showed that hiring slowed considerably on account of Hurricane Sandy. However, the services sector remained largely immune to the economic weakness, as data from ISM showed an unexpected improvement in services sector for November. Apart from central bank meetings in Europe, all eyes will hover around today’s jobless claims figure in the US.
Euro – European Markets
The Euro failed to cling on to its 1.31 mark against the US Dollar in yesterday’s trading session, as the Spanish bond yield climbed after demand at the nation’s latest bond auction undershot expectations. The woes for the Euro were further aggravated after S&P lowered its credit rating on Greece deeper into the junk territory, as the rating agency sees the debt restructuring exercise in lines of a default.
In the monetary policy meeting today, the ECB is expected to leave its benchmark interest rate unaltered but a downgrade of growth forecast remains on cards, given the weakness seen in the latest indicators. Against this backdrop, the ECB Chief is expected to maintain his dovish stance in the post meeting press conference and will shed more light on the ECB’s OMT plan, in the midst of Spain’s reluctance to seek a full blown-out aid package.
Data due later today is expected to confirm that the Eurozone languished in a recession for the third quarter. This should not come as a surprise to traders given the fact that yesterday’s retail sales data in the Eurozone missed market expectations by a wide margin.
Other Currencies – Highlights
The Swiss Franc has failed to garner strength against the majors this morning on account of weak economic data from Switzerland. Data revealed that labour market scenario in the nation has deteriorated, with the unemployment rate in Switzerland nudging higher for November. Moreover, there still remains a slim chance of the SNB revising Swiss Franc’s floor against the Euro on account of the persistent deflationary trend in the Swiss economy, as data released earlier today showed an unexpected decline in the Swiss consumer prices for November.
With no major domestic data scheduled for release today, traders will keep a track of monetary policy actions from Europe and tomorrow’s non-farm payrolls data from the US for further direction in this week’s session.