In the UK, data just out has revealed that consumer price inflation remained unchanged for November at levels much above the BoE’s 2% inflation target. This gives the central bank plenty to chew over with regard to authorising further asset purchases and the minutes of the last policy meeting, due tomorrow, should provide further insights into the path likely to be followed by policymakers.
Across the Atlantic, the "fiscal cliff" budget tussle has taken a decisive turn, with the latest counter-offer from the US President expected to help advance negotiations with top Republican, John Boehner, to avert impending tax hikes and spending cuts. This should keep “risk on” sentiment supported in today’s trading session.
Pound Sterling – UK Markets
The Pound was on a firmer footing against the Euro in yesterday’s trading session following downbeat comments from ECB President, Mario Draghi, over the region’s economy. Sterling also gained traction against the greenback, partly benefitting from last week's monetary easing in the US.
Renewed market optimism that US lawmakers could reach a deal in time to avert the “fiscal cliff” has supported Sterling against the US Dollar this morning. Data just out has indicated that UK annual consumer price inflation remained unchanged at 2.7% for November, much above the BoE's 2% target. This has shifted focus to tomorrow’s minutes of the latest monetary policy meeting of the BoE, wherein policymakers are expected to reiterate their “wait and see” approach. However, market participants will look for cues on the probability of the central bank authorising more bond buying in the future.
With little on the domestic economic calendar today, traders are likely to set their sight on developments in US budget talks for further direction to market sentiment. Additionally, the quarterly BoE bulletin later today will be dissected for hints to the nation’s economic health.
US Dollar – US Markets
Markets were in for a pleasant surprise this morning, as reports indicated that differences over the US “fiscal cliff” issue have narrowed significantly, following Barack Obama’s counter-offer to Republicans that included a major change in position on tax hikes for the wealthy. This has indeed limited upside for the US Dollar against the majors in today’s trading session; however, it would be too early to give a thumbs up to the overall budget talks as some dilly dallying is expected to continue for some time.
Meanwhile, there were few takers for the US Federal Reserve’s asset buying programme, as the President of the Reserve Bank (Fed) of Richmond indicated that the central bank’s latest policy actions are unlikely to do much to reduce unemployment, boost economic growth and could spark inflation. The Empire state manufacturing data, released yesterday, which showed a decline in activity for the fifth consecutive month in December, also substantiated his stance.
On the macro front, current account balance figures and NAHB housing market data due later today are likely to garner modest market attention. The focus undoubtedly will be on the ongoing “fiscal cliff” negotiations in the US, with the balance slightly tilted on the positive side.
Euro – European Markets
The Euro failed to garner strength against the majors yesterday after the European Central Bank President, Mario Draghi, stressed that the situation in the Eurozone remains difficult and the medium-term outlook for economic activity remains challenging. In addition, the Chinese sovereign wealth fund indicated that it is “not optimistic” about the region’s economy. Furthermore, an EU report indicated that the Greek economy could contract by more than 4.2% in 2013, pushing the country into its sixth consecutive year of recession.
However, the common currency has limited its losses against the greenback this morning amid renewed optimism surrounding US budget talks. With a light European economic calendar ahead, markets are likely to focus on tomorrow’s IFO sentiment indices in Germany for further direction.
Other Currencies – Highlights
The Australian Dollar has registered marginal losses against the US Dollar this morning, after minutes of the recent Reserve Bank of Australia’s meeting revealed that labour market conditions in the country remained soft. Additionally, it indicated that a rate cut initiated in the last meeting was primarily to provide a boost to non-mining sectors of the economy, as the resource sector investment is expected to peak going forward.
However, the Conference Board’s leading economic index for Australia showed an improvement for October, providing some relief to the Aussie Dollar. Mixed sets of economic data from China also did little to offer some definite direction to the Dollar.
With the holiday season fast approaching and no major economic releases during this week, the Aussie Dollar is likely to track external developments to gauge risk appetite among investors.
Political Jitters in UK Weighs on Pound Sterling
Euro and Pound Sterling Recover Modestly on Friday
The US Dollar Rallies on Upbeat Data and Hawkish Fed Stance