US Stays on the Brink

With the US budget talks set to resume after the Christmas break, markets are hopeful that US policymakers would find some common ground before the current fiscal stimulus expires later this week. The cautious optimism surrounding the US budget deal along with hopes of further monetary stimulus in Japan has helped high yield currencies to gain ground in today’s trading session. At home, concerns surrounding the British economy have eased a little after data showed a pick-up in demand for mortgage loans, while retail sales during the holiday period remained robust.

Pound Sterling – UK Markets

Sterling is trading on a firmer footing against the greenback in today’s trading session, broadly supported by optimism that policymakers in the US might avert the looming fiscal crisis in time. Although the latest figures from the BoE showed no major demand for funding through the recently launched lending programme, mortgage borrowings data just released has offered a contrasting picture as it showed a modest appetite for house purchase loans. Additionally, retail sector in the UK is expected to perform better, as reports indicate strong growth in retail volumes, broadly due to last minute Christmas spending. However, Sterling is trading mostly flat against the Euro this morning. In the midst of no major domestic cues during the current truncated week, traders will keep a close watch on events unfolding on the other side of the Atlantic for further direction to market risk appetite. Meanwhile, with the latest economic releases reaffirming perception that UK would fail to replicate the strength shown for the third quarter, all eyes will hover around PMI releases scheduled next week for clarity over the UK’s economic performance in the final phase of the fourth quarter.

US Dollar – US Markets

After weeks of dilly-dallying, policymakers in the US are set to meet following the Christmas holiday period, Barack Obama, is expected to set the ball rolling by reviving the budget talks which stalled last week. The greenback continued to trade lower against the Euro and Sterling in today’s session, as traders stayed hopeful that some agreement over the “fiscal cliff” issue remains in the offing. However, further standoff over contentious issues cannot be ruled out, as the US Treasury Secretary has indicated that the Treasury department will soon start enacting measures to prevent the government from exceeding the legal borrowing limit, thereby sending a strong signal that eyes would be fixed on the political arena even if the current crisis is averted. Among key macro releases, S&P revealed that housing prices in the US continued to climb, in line with the recent broadly positive housing data. In today’s trading session, consumer confidence indicator is expected to shed some light on consumer morale during the Christmas period, while jobless claims figure will be watched closely ahead of the next week’s labour market data. The new home sales data is expected to further corroborate the green shoots in the US housing sector.

Euro – European Markets

The Euro continued to nudge higher against the US Dollar amid hopes that the global economic recovery is gaining momentum after data revealed a sharp spurt in China’s industrial profits and after the newly appointed Japanese Prime Minister maintained his pledge to undertake essential measures to push the central bank to inject further monetary stimulus. Additionally, market hopes that the US “fiscal cliff” could be averted has further spurred risk appetite amongst investors. However, following S&P’s downgrade in November 2012, the French economy continues to remain in the eye of the storm, as the IMF warned that high tax burden could lead to the nation missing its deficit target for next year. With no economic cues from the Eurozone scheduled today, traders will keep an eye on developments from the US for further direction. Meanwhile, a flurry of economic releases scheduled for next week is expected to provide hints over the Eurozone’s economic performance.

Other Currencies – Highlights

The Swiss Franc has declined marginally against the Euro in today’s trading session after data from UBS showed that its indicator of private consumption in Switzerland declined to a reading of 1.23 in November from 1.30 in October, partly hurt by a drop in new car registrations. However, the Swiss Franc has gained against most of the other currencies, broadly supported by the strength seen in the Euro. With no further economic releases scheduled for the week, traders are largely expected to keep an eye on budget talks in the US for further direction to currency markets. Additionally, the manufacturing PMI release scheduled for release next week is expected to throw some light over the manufacturing situation in Switzerland, given the recent improvement in economic conditions in major global economies.