US Running Out of Time

With the US consumer confidence data sending worrying signals, the noose is slowly but surely tightening around policymakers’ necks, leaving them with very little time to prevent across the board tax increases and deep spending cuts from taking effect. In a last ditch effort, congressional leaders from both parties are expected to meet at the White House later today, with traders anxiously hoping that lawmakers would reach a temporary deal to prevent the US economy falling into a recession. At home, with no major domestic economic data on tap, traders will be closely watching PMI releases from the UK due next week for clarity on whether the economy matched the pace of growth shown in the third quarter.

Pound Sterling – UK Markets

With domestic cues evidently taking a backseat, the final few trading sessions of the year is likely to be driven by cues across the Atlantic and the stance that US policymakers plan to adopt to avert the brewing crisis. The Pound declined against the US Dollar in yesterday’s session, given the prevalent possibility of the US economy going over the cliff. Meanwhile, Sterling held steady against the Euro, broadly due to the lack of major cues from the European nations. Although retail sales during the holiday period in the UK were fairly positive, there still remains concerns over the consumer morale in Britain, as latest data from the BBA indicated that households in the UK continued to adopt a cautious approach, as they opted to pay back more than what they had borrowed on credit cards for November. With today’s domestic economic calendar being on the light side and the Pound trading in a fairly tight range against the majors, traders will be closely eyeing PMI releases and mortgage lending figures in the UK scheduled next week for further clarity over the performance of the British economy in the fourth quarter.

US Dollar – US Markets

In a last dash attempt to prevent automatic tax increases and spending cuts from coming into effect, the US President, Barack Obama and the nation’s lawmakers are expected to hold a last round of budget talks before the New Year deadline. Although continued brinksmanship from either side of the political arena continues to pose a threat to the US economy, there still remains a ray of hope that a partial agreement would be reached leaving the policymakers to deliberate on contentious issues such as entitlement reform and the debt ceiling later in 2013. The US Dollar strengthened against the Euro and Sterling in the latter half of yesterday’s trading session. Data showed that the US consumer confidence slipped to the lowest level in four months, as consumers scaled down their spending on account of the persisting logjam between policymakers in the US for rolling over the existing fiscal stimulus. However, number of Americans claiming jobless benefits slipped sharply, tuning focus to the next week’s non-farm payrolls figures. Apart from developments from the Capitol Hill, market participants are expected to pay a passing attention to today’s US pending home sales data, especially after yesterday’s broadly upbeat new home sales data.

Euro – European Markets

The Euro nudged lower against the US Dollar in yesterday’s session, as traders flocked to safe haven currencies on account of lower risk appetite. The downward trend has continued this morning, as traders remain on the sidelines ahead of the outcome of the US budget talks. In the midst of simmering political tensions in Italy, the nation witnessed a spike in its short term borrowing costs in yesterday’s auction. Against this backdrop, traders will keep a close eye on Italy’s auction of longer tenure bonds today to gauge market’s risk appetite for peripheral bonds. Meanwhile, the German finance minister indicated that the crisis in the Eurozone is already past the peak. However, the German finance minister’s assessment remains questionable, as the Greek central bank warned that the four biggest banks in Greece would need funds worth €27.5bn in recapitalisation by the end of April 2013. Apart from the Italian bond auctions, traders will keep a close eye on the US budget negotiations over the weekend for further direction to market sentiment.

Other Currencies – Highlights

The Japanese Yen continued its slide against its major peers in today’s session after data showed that deflationary trend in Japan persisted for November. The weak consumer prices have spurred hopes of further monetary stimulus by the Bank of Japan, given Japan's Prime Minister, Shinzo Abe’s repeated calls to raise the central bank’s inflation target to 2%. Additionally, Tokyo CPI, which is widely seen as a leading indicator of national CPI, slipped further into the deflationary territory and does not bode well for the economy going forward. Among other economic releases, economic activity in Japan remained subdued, as the latest manufacturing PMI fell deeper into the contraction territory for December, while industrial production declined more than expected for November. However, an improvement in retail sales and the unemployment scenario for November provided some ray of hope. With the Japanese Yen hovering close to multi year lows against the greenback, traders are expected to stay watchful about events in Japan and the US for further direction.