BoE Easing Off

The BoE minutes of the last policy meeting, released yesterday, poured cold water on hopes that further asset purchases might be in the offing going forward, with David Miles being the lone contender advocating the stance of additional QE. Retail sales data just out has shown an improvement for November, affirming the “wait and watch” stance adopted by other policymakers in the committee. Meanwhile, high yield currencies erased their earlier session gains yesterday after the US budget negotiations took a surprising turn for the worse. The ongoing see-saw in the “fiscal cliff” talks along with the revised US third quarter GDP data are likely to provide sufficient news flow to keep market participants interested in today’s session.

Pound Sterling – UK Markets

Receding hopes of additional asset purchases in the near future, following the BoE minutes and sticky consumer price inflation numbers, led the Pound to trade on a firmer footing against the US Dollar in the initial trading session yesterday. However, gains in Sterling soon dissipated following a dismal CBI Distributive Trades Survey, which showed that retailers were not too optimistic over UK retail sales volumes in early December. The US “fiscal cliff” talks turning sour also made matters worse for high yield assets. The Pound is trading in a tight range against the majors this morning, with markets keenly focused on news flow emanating from the US budget talks. Data just out has revealed that annual retail sales in the UK grew at a faster pace for November. This should provide some upside scope to the Pound against the majors in today’s trading session. With little on the domestic economic calendar today, Sterling is likely to take cues from external factors to gauge market sentiment. Markets will also eye tomorrow’s revised UK GDP data for the third quarter, wherein a confirmation of earlier numbers is expected.

US Dollar – US Markets

Following the initial bout of optimism surrounding the Eurozone and the US budget talks, the conflict in negotiations to avoid planned tax hikes and spending cuts in the US grew more heated, resulting in traders seeking shelter in the safe haven currency in the latter part of yesterday’s session. The US President, Barack Obama, threatened to veto the Republican tax plan, which at best can be termed as political posturing. However, the souring of the “fiscal cliff” negotiations does not bode well for markets heading into a holiday season. Meanwhile, the heavy US economic calendar later today is likely to keep investors guarded following yesterday’s mixed set of housing data in the US. The third quarter GDP data, which is expected to be revised upwards, coupled with a likely improvement in Philly Fed manufacturing index, should bring some cheer to market participants. However, the jobless claims data is expected to show deterioration, validating the concerns of the Fed over the labour market. With the US Dollar looking for further direction against the majors in today’s trading session, developments in the US budget talks and a wide array of economic releases could prove decisive for its movement.

Euro – European Markets

The Euro moved close to the 1.33 mark against the US Dollar in yesterday’s trading session, as worries engulfing the German economy eased following better than expected business confidence data. Additionally, optimism surrounding Greece was given a boost after the ECB allowed Greek debt as collateral, reversing an earlier ban made in July 2012. However, the gains in the Euro proved short lived after the US President made known his displeasure with the Republicans on the so called “Plan B”. In absence of major triggers, the Euro is trading in a tight range against both the Pound and the US Dollar in today’s session. The Greek finance minister opined that 2013 will be a “make or break year” for his country, eclipsing some positive news flow on Greece during this week. Apart from Eurozone consumer confidence data later today, there is little to distract investors on the European front. Markets should undoubtedly keep an eye on “fiscal cliff” negotiations and macro data from the US for further direction.

Other Currencies – Highlights

The Bank of Japan, in its much awaited monetary policy decision, expanded its asset purchase programme by ¥10 billion, while leaving its interest rate unchanged at current levels. With much of the decision of the committee already priced in, investors booked profits on their bets against the Yen, resulting in the Japanese currency gaining ground against the majors this morning. The movement in the Yen against the majors today can be best judged as a case of “buy the rumour, sell the fact”. Additionally, the looming threat of US budget talks derailing also supported gains in the Yen against its major counterparts. The Japanese central bank also indicated that it would review its stance on price stability, which is seen as an attempt by the Bank of Japan to pacify the incoming Prime Minister, Shinzo Abe, who has called for unlimited monetary easing to achieve 2% inflation. With the monetary policy landscape wide open following the recent win of the Liberal Democratic Party, it remains to be seen how much the country will stretch itself to get its house in order.