Christmas Dominates Market

With Christmas just around the corner, thin trading volumes in today’s session cannot be ruled out on account of the festive mood prevalent in markets, amid modest risk aversion after the US fiscal cliff negotiations broke down. The “fiscal cliff” impasse in the US continues and negotiations between lawmakers are likely to resume only after Christmas. Traders are likely to remain on the sidelines, with the major currency pairs expected to trade in a fairly tight range. The economic calendars across the globe also have little to offer during this week in order to have any meaningful impact on market sentiment.

Pound Sterling – UK Markets

The Pound was under pressure against the majors in Friday’s trading session after the sequential third quarter GDP data was unexpectedly revised downwards, due to lower output in the services and production sectors. Additionally, the UK Chancellor’s austerity drive seemed to be in disarray after data showed that the public sector net borrowing rose for November. The downbeat consumer confidence for December also played its part prompting traders to move away from the Pound. With the US budget talks lacking direction, the movement in Sterling remained in a tight range against the majors this morning. Data released earlier today showed that house prices in the UK, as measured by Hometrack, continued to decline for December. The Nationwide house prices and BBA mortgage approvals data slated for release later this week are likely to shed more light on the domestic housing sector. With the prevalent festive mood in markets and a light global economic calendar today, we do not expect that Sterling to have any decisive moves against its major counterparts.

US Dollar – US Markets

Washington's indecisive delay to come up with a solution to avert automatic spending cuts and tax increases have sparked fears of a recession, prompting market participants to seek shelter in the US Dollar in Friday’s trading session. The budget plan proposed by the Republican Speaker of the US House of Representatives, John Boehner, failed to win support from his own party, raising concerns about the prospects of a deal. The crucial US budget talks are now likely to resume only after Christmas, with market participants hoping that a deal could be reached in time after some Republicans on Sunday endorsed Obama's call for a partial deal. Meanwhile, data released on Friday showed that the US economy was surprisingly resilient for November, with consumer spending in the US hitting three-year high and durable goods orders posting a rise for November. This has raised optimism among market participants about the fourth quarter GDP reading slated for release in early 2013. With the US Dollar trading marginally lower against both the Pound and the Euro this morning, further downside in the greenback looks limited due to lack of any major triggers.

Euro – European Markets

The Euro slipped against the US Dollar in Friday’s trading session after John Boehner pulled the plug and conceded that he does not have enough support for his “Plan B” to avert the “fiscal cliff”. The two leaders adjourned for the holiday season without getting any closer to a budget deal. Additionally, the economic data released on Friday did not offer any respite to the Euro. Data showed that the German consumer confidence would deteriorate for January, which does not bode well for the German economy going forward. Meanwhile, the Italian Prime Minister, Mario Monti, tendered his resignation shortly after the Parliament approved his government's 2013 budget, paving way for a highly uncertain national election in February 2013. With the Euro having little to take direction from the economic front, the common currency is likely to be range bound against its major peers in today’s trading session.

Other Currencies – Highlights

The Japanese Yen is trading under pressure against the majors after Japan’s incoming Prime Minister, Shinzo Abe, stuck to his rhetoric of a 2% inflation targeting to dodge the deflationary trends in the economy. He warned to revise the law governing the Bank of Japan, if the central bank refuses to introduce a 2% inflation target at its monetary policy meeting scheduled in January 2013. Meanwhile, the current week has a lot in store for the Yen traders to ponder upon. The Bank of Japan minutes of the last monetary policy meeting slated on Wednesday will garner most of the market attention for hints on whether the 2% inflation target played on the minds of the policymakers. Additionally, the consumer price inflation, jobless rate, retail sales and industrial production are also on tap this week and should provide an overall picture on the economy’s health.