BoE Keeps Sterling on Steady Course

The BoE minutes of the last policy meeting released this morning has kept market speculation of further easing for the UK economy at bay, as the MPC members voted 8-1 to keep the current asset purchases on hold. This along with yesterday’s stubborn inflation data bodes well for Sterling against the majors. In Europe, traders were in for a pleasant surprise after S&P upgraded its credit rating on Greece by six notches and German Ifo data surprised on the upside. Across the Atlantic, housing data later today should provide a positive distraction. However, market focus should remain squarely on the ongoing US budget talks and would hold the key in determining risk appetite.

Pound Sterling – UK Markets

The Pound marched ahead against the US Dollar in yesterday’s trading session, as sticky consumer price inflation numbers in the UK for November fuelled speculation that the BoE will avoid further asset purchases for now. Additionally, market sentiment was bolstered amid hopes that the logjam between US lawmakers over budget talks might end soon. The BoE, in its quarterly bulletin, also sounded a little optimistic as it opined that early signs from the Funding for Lending scheme have been encouraging. The much awaited minutes of the BoE’s last monetary policy just out has revealed that majority of the policy makers voted to keep the monetary stance unchanged which has defied hopes of further easing in the near future. This along with positive news flow from the Eurozone and the US should probably keep the Pound well supported against its major counterparts in today’s trading session. The next driver for Sterling is likely to be retail sales data due tomorrow which is likely to show an improvement for November.

US Dollar – US Markets

“Risk on” sentiment was the order of the day yesterday, with markets expecting the US lawmakers to reach a deal before the New Year, thereby prompting traders to shun the US Dollar and move towards high yield currencies. The deal, if agreed in time, would eliminate a lot of uncertainty surrounding the global economy and offer a ray of hope to investors already grappling with the long and tenuous Eurozone debt crisis. The US House majority leader sounded upbeat, as he indicated that he expects Republicans to pass “fiscal cliff” bill on Thursday. Apart from the US “fiscal cliff”, there were signs of the US economy making progress on the housing front as well, with confidence among the US home builders for December reaching the highest level since April 2006. Markets expect the upbeat mood to continue in today’s session, as building permits data due later today is likely to show an improvement. Meanwhile, questions over the efficacy of the Fed’s bond buying programme continued to be raised, with the Dallas Fed President being the recent to join the bandwagon. We believe that the upside for the Greenback would be limited in today’s session, given the positive news flow emanating from the budget talks.

Euro – European Markets

Signs of progress in the US “fiscal cliff” negotiations led the Euro to garner traction against the majors in yesterday’s trading session. The risk sentiment has carried on to this morning, with the Euro trading above the 1.32 mark against the Greenback after S&P raised its credit rating on Greece to “B-” from “Selective Default”, citing the recent successful Greek bond buyback programme and commitment of the Eurozone members to keep the nation a part of the common currency. The clouds surrounding the Eurozone economy has further faded after data released earlier today showed an up tick in the German business climate index for December. This should keep hopes alive that the German economy could weather the financial turmoil in the region. Additionally, Spain played its part in guarding the optimism after it yesterday sold more than the targeted amount of short term debt at lower yields. With no major European macro indicators on deck today, risk sentiment is likely to be determined by the progress in the US budget talks.

Other Currencies – Highlights

Following some initial session losses, the Kiwi Dollar has gained some ground against the US Dollar this morning. New Zealand’s current account deficit as a percentage of GDP came in better than expected for the third quarter. Additionally, the seasonally adjusted current account deficit narrowed for the year through September 2012. The optimism surrounding the US budget negotiations and an upgrade of Greece by S&P has also contributed in limiting losses for the Kiwi Dollar. The next economic release which could have a bearing on the Kiwi Dollar is tomorrow’s third quarter GDP data which is likely to indicate a slower pace of growth. We caution that investors should also keep a close eye on the US “fiscal cliff” negotiations as it could likely prove detrimental in swaying market sentiment.