Greece has once again managed to crawl its way out of a storm, as reports indicated a successful completion of its bond buy back programme. Meanwhile, the Italian Prime Minister caused concern in financial markets by offering to resign, following the loss of support from the Freedom People party.
Across the Atlantic hiring remained robust, with the unemployment rate falling to its lowest level in close to four years. Against this backdrop the Fed’s monetary stance this week will be keenly eyed, given the uncertainty surrounding the extension of “Operation Twist” into 2013. At home, focus shifts to labour market data due later this week to gauge Britain’s economic prospects.
Pound Sterling – UK Markets
The Pound has limited Friday’s decline against the US Dollar and is trading almost unchanged this morning. Data released earlier today showed a sharp deterioration in Lloyds employment confidence, making traders jittery ahead of this week’s labour market data, which should give a clearer picture of the employment situation in the UK. However, the Pound has moved higher against the Euro, amid worries surrounding the Eurozone economy.
With the latest PMI readings showing signs of weakness, there are growing worries that the recovery witnessed in the third quarter may be short lived. The UK Business Minister, Vince Cable, echoed similar concerns as he stated that the UK economy could fall back into recession for a third time since the 2008 financial crisis.
With no major economic releases scheduled during the day, traders will closely watch developments in the Eurozone and the US for further direction to currency markets.
US Dollar – US Markets
In Friday’s trading session the greenback climbed higher against the Euro, as fears of a recession in Germany, coupled with signs of political instability in Italy, prompted traders to shun high yield currencies. The US Dollar has continued to nudge higher against the Euro this morning, as concerns surrounding the political scenario in Italy came to the fore after the Italian Prime Minister offered to resign.
Meanwhile, the Fed’s monetary policy meeting later this week is likely to provide some direction to the US Dollar. Although the central bank is seen extending its “Operation Twist” into 2013, there remains a slim chance that the Fed could scale down the size of asset purchases under the programme, following last week’s upbeat non-farm payrolls data. Additionally, it remains to be seen how soon policymakers would be able to bridge their differences in order to reach a deal on extending the fiscal stimulus, especially after a handful of top Republicans offered signs of giving up their opposition to higher tax rates on the rich.
Apart from the FOMC meeting, traders will be all eyes to retail sales, inflation and industrial production figures from the US to gauge appetite for safe haven currencies.
Euro – European Markets
The Euro has continued to lose ground against its peers and briefly slipped below the 1.29 mark against the US Dollar this morning, as fresh signs of crisis in the major Eurozone nations prompted traders to tread cautiously. A political crisis is brewing in Italy as the nation’s Prime Minister, Mario Monti, expressed his intentions to resign after Silvio Berlusconi's party withdrew crucial support in Parliament, thereby posing a threat to the nation’s economic reform agenda.
Additionally, the German economy showed signs of succumbing to the region’s economic mess on Friday after the Bundesbank sharply scaled down its 2013 economic growth forecast on Germany. To add to woes, German industrial production data for October missed market expectations by a wide margin. However, today’s data has revealed a surprise improvement in German exports for October.
With data just out revealing an improvement in Eurozone investor confidence for December, the optimism may be short lived as Italy’s third quarter GDP data later today is likely to show that the nation remained mired in recession in the third quarter.
Other Currencies – Highlights
The Japanese Yen has advanced marginally against its major peers in today’s trading session as traders increased their exposure to safe haven currencies, amid signs of political uncertainty in Italy and weakness in the German economy. Moreover, data released earlier today revealed rising inflationary pressures in the Chinese economy.
Meanwhile, economic trends from the Japanese economy also offered worrying signals. Data out earlier today confirmed a 0.9% contraction in Japan’s third quarter GDP, while Japan’s current account surplus narrowed for October. Moreover, the nation’s economic outlook for the fourth quarter remains bleak, as an index measuring performance of large manufacturers showed a decline for the fourth quarter.
US Dollar Continues to Outperform European Rivals
Pound falls further
British Pound Suffers Losses Ahead of Tuesday's Critical Vote