With Italy seemingly headed for an election early next year, tremors from the Italian political arena were felt in the bond markets across Europe yesterday, with peripheral bond yields soaring. Despite the turmoil, markets found solace in the news that the US Fed might extend its existing monetary stimulus into next year at its two-day monetary policy meeting commencing today. Additionally, news flows from Britain were relatively sanguine, as the OECD reported some pick up in UK economic growth in 2013. The rub of green is expected to continue this morning, with ZEW sentiment indices in Germany and the Eurozone expected to show an improvement for December.
Pound Sterling – UK Markets
Market expectations that the US Fed might extend its “Operation Twist” programme into 2013 led the Pound to gain upward momentum against the US Dollar in yesterday’s trading session. However, Sterling stayed range bound against the Euro due to a lack of any decisive triggers from both the UK and the Eurozone.
Meanwhile, the OECD composite leading indicator showed that Britain's economic recovery continued to gather steam following a pick-up in consumer morale last month. However, it remains to be seen whether this improvement can translate into the nation avoiding a contraction in the fourth quarter. The deterioration in the housing data from the Royal Institution of Chartered Surveyors has further validated market belief that the UK economy faces tough times ahead.
We believe that Sterling is unlikely to have independent moves against the majors today in the wake of a light domestic economic calendar. With the Pound looking for direction against both the Euro and the US Dollar this morning, traders are likely to focus on events in the Eurozone and across the Atlantic for further direction.
US Dollar – US Markets
In today’s trading session, the US Dollar has failed to recover from yesterday’s losses against the majors, as traders continue to weigh the possibility of the Fed extending its “Operation Twist” programme at its two-day monetary policy meeting commencing later today. Although the Fed is widely expected to keep its key interest rate unchanged, there still remains an underlying possibility of the central bank scaling down the size of its asset purchases.
Meanwhile, budget talks between US policymakers continued, with no major initiatives taken for breaking the stalemate over the decision to extend the current fiscal stimulus. Raising taxes on the wealthy remains the key point of contention during the budget negotiations.
On the macro front, there is little of market interest today, with traders glued to tomorrow’s outcome of the FOMC meeting. Data due later today is expected to show that the US trade deficit widened for October, owing to weaker exports. Apart from the build up to the Fed’s monetary policy decision in tomorrow’s session, traders are expected to keep an eye on sentiment indices data from the Eurozone and news flow from the “fiscal cliff” negotiations to gauge risk appetite among investors.
Euro – European Markets
Despite the political turmoil prevalent in Italy, the Euro staged a recovery and held well against the US Dollar yesterday, supported by belief that the Fed might continue with its current easing stance at its monetary policy meeting starting today.
However, simmering worries in the Italian political arena have opened up new wounds, as bond yields in peripheral economies surged. Similar concerns were expressed by the Spanish Economy Minister, as he opined that Spain would suffer contagion from Italy's new political turmoil. Against this backdrop, today’s short term bond auction in Spain is expected to shed some light, ahead of the auction of longer dated bonds in Italy and Spain later this week. Meanwhile, the Italian Prime Minister tried to calm market nerves by indicating that his government would stay “fully in charge” until the elections.
With yesterday’s data showing some improvement in the Eurozone’s investor confidence, traders are likely to look for a similar trend in the German and the Eurozone ZEW economic surveys scheduled for release later today.
Other Currencies – Highlights
The Aussie Dollar is trading under pressure against the greenback in today’s session after data from the National Australia Bank showed that the nation’s business confidence index, highlighted as the key gauge of the economy's health by policymakers, slipped to the lowest level since April 2009. This should provide some justification to the recent rate cut initiated by the Reserve Bank of Australia. Additionally, mostly mixed economic data from China yesterday yielded no major support to the Australian Dollar.
In the midst of the prevalent weakness in the Australian economy and unclear signs from China, traders are expected to stay all ears to the Reserve bank of Australia Governor’s comments tomorrow for clarity over the central bank’s stance in the near future. Besides, the monetary policy meeting in the US and bond auctions in the Eurozone will also influence high yield currencies in this weekly session.
British Pound Suffers Losses Ahead of Tuesday's Critical Vote