Will Christmas Bring Cheer?

There seems to be no end to the brinkmanship of US lawmakers after the Republicans took a U-turn by cancelling a vote on “Plan B” citing lack of support. This has raised uncertainty over the future of the budget negotiations and deepened the threat of a recession in the world's largest economy. At home, the sequential final reading of the third quarter GDP surprised market participants on the downside. Additionally, deterioration in the consumer confidence along with the weaker than expected retail sales data yesterday should serve as an alarm for the UK economy. In the final full trading session before Christmas, traders have a raft of US macro data and the painful budget talks to concentrate upon today.

Pound Sterling – UK Markets

The Pound is trading under pressure against the US Dollar this morning after the US House Republican leaders scrapped plans for a vote on taxes, adding to concerns that lawmakers might fail to reach a deal on time to avert the “fiscal cliff”. Additionally, data released earlier today showed the dismal state of the consumer confidence in December which does not bode well for the upcoming holiday season. The low consumer morale was also reflected in yesterday’s lower-than-expected retail sales data. However, data just out has indicated that the UK economy grew 0.9% sequentially in the third quarter, lower than the previous estimate of a 1% growth. This has added more ambiguity to traders amid the looming uncertainty about the outcome of the US budget talks. Moreover, data showed that the public sector net borrowing in the UK rose more than expected for November, providing some food for thought for the UK Chancellor. With traders headed into a festive season, the only major determinant for risk appetite would be the news flow emanating from the US fiscal negotiations.

US Dollar – US Markets

The arm-twisting in the US budget negotiations continues, with the Republicans cancelling a vote on their back-up measure to prevent the advent of automatic tax increases and spending cuts. This has raised serious questions about the future course of the budget talks, triggering traders to seek shelter in the US Dollar this morning. However, there was some good news on the macro front, with an upward revision to the US third quarter GDP surpassing market expectations, providing hopes that the US economic recovery remains on track. The housing sector continued to remain the bright spot of the economy, with the existing home sales for November surprising market participants on the upside. However, following the recent improvement in the US jobless claims, yesterday’s data missed market consensus by a whisker. The upcoming trading session later today has all the ingredients to keep traders on their toes. We have an array of economic releases including personal income and spending, Reuter/Michigan consumer confidence and some regional manufacturing indices. However, developments in the US “fiscal cliff” negotiations would garner most of the market attention, as it remains the immediate threat to the US economy.

Euro – European Markets

The Euro surrendered its gains against the majors in the latter part of yesterday’s trading session following weak consumer confidence reading in the Eurozone for December. This has again served as an indicator for the region’s policy makers that all is not well in the common currency area, as the recent manufacturing PMI’s across Eurozone also painted a dismal picture of the economy. Markets expect the ECB to undertake an interest rate cut in the first quarter of 2013. The flip-flop of the US lawmakers about the US budget talks took an ugly turn, leading the common currency to trade under pressure against both the Pound and the US Dollar today. The German consumer confidence data also failed to offer any respite, as it deteriorated more than expected for January. Meanwhile, the IMF has indicated that Europe must complete its plan to create a banking union to overcome the sovereign debt and banking crisis in the region. With little on the European economic calendar today and the next week, the Euro’s direction is likely to be determined by external factors.

Other Currencies – Highlights

The Kiwi Dollar weakened against the majors yesterday after data indicated that the economy grew 0.2% sequentially in the third quarter, half the expected pace. Additionally, historical revisions to the GDP data indicated that the nation’s economy suffered two recessions in the past four years. The business confidence and activity outlook indices also offered little scope for any upside movement. However, the Finance Minister, Bill English, sounded reasonably upbeat, as he opined that the economy would remain on track for a moderate growth in the next few years. The downward trend has continued this morning, with the New Zealand currency trading under pressure against the majors, as risk appetite amongst investors waned after the House Republican leaders cancelled a vote on “Plan B” which included higher tax cuts for annual income above $1 million. We expect little upside potential for the Kiwi Dollar in today’s trading session on account the prevalent muted risk sentiment among market participants.