It's the Final Countdown

With the US fiscal stimulus just hours away from expiring, the continuing political brinkmanship threatens to push the world’s largest economy off the fiscal cliff. Against this backdrop, the US President has endorsed the widely held belief that a failure to reach consensus could lead to an "adverse reaction" in financial markets. Higher tax rates for the wealthy and disagreements over cuts in spending remain the key point of contention for both parties. Meanwhile, an important set of economic releases from both sides of the Atlantic are also expected to garner some attention during this curtailed weekly session on account of their growing influence on monetary policy decisions. Sterling traders await this week’s PMI releases for further direction.

Pound Sterling – UK Markets

The Pound has failed to gain traction against the US Dollar in today’s session, as traders continued to fear the possibility of the US economy going over the fiscal cliff with an absence of clear signs of the US lawmakers agreeing on a deal to avert the looming crisis. However, Sterling maintained its gains against the Euro, largely due to traders’ aversion for riskier assets. On Friday, Sterling edged higher against the single currency, as borrowing costs climbed at the Italian long tenure bond auctions. The Lloyds business barometer climbed for December, showing some signs of improvement in the business sentiment during the holiday period. However, the final outcome of the fiscal cliff negotiations will remain a key point to reckon for all major global economies. A flurry of PMI releases from the UK over the next three trading sessions are widely expected to assist traders to unearth a clearer picture about the performance of the British economy in the final quarter of 2012.

US Dollar – US Markets

With the countdown drawing to a close, the inability of lawmakers in the US to seal a much needed deal to prevent the current fiscal stimulus from expiring continues to cripple market sentiment, thereby prompting traders to seek shelter in safe haven currencies in today’s session. Both sides in the political arena remained at loggerheads and prospects of a “grand bargain” remain elusive. A raft of economic releases scheduled during this week is widely expected to be sidelined, given the broader repercussions of the stance adopted by policy makers in Capitol Hill. However, the non-farm payrolls data scheduled for release on Friday will remain a key determinant for the Fed’s future course of action. Besides, minutes of the Fed’s latest monetary policy meeting is expected to shed some light on the newly administered monetary stimulus. Macro indicators related to manufacturing and services activity for December will provide insights into the recovery following the devastating impact of Hurricane Sandy. With the Dallas Fed manufacturing index being the only major macro release today, developments from the US political arena will remain the bone of contention in today’s trading session.

Euro – European Markets

In the midst of continuing political stalemate in the US, the Euro slipped below the 1.32 mark against the greenback this morning, as traders continued to adopt a cautious stance. With divisions between both the political parties hardening, the prospects of the US economy going over the cliff remains a legitimate threat. The Euro lost steam against the majors in Friday’s session after Italy witnessed its borrowing costs rise in a bond auction, largely due to the brewing political turmoil in the nation. With peripheral economies showing no major signs of improvement, the German Chancellor, Angela Merkel, opined that the Eurozone sovereign debt crisis is far from over. Going forward, traders will keep a close watch on the Eurozone and German CPI data scheduled for release during this week, especially after the ECB Chief, Mario Draghi, hinted that further interest rate cut remains on cards. With no major Eurozone economic releases today, developments from the US will remain the trendsetter in today’s session.

Other Currencies – Highlights

Despite the prevalent threat of the US fiscal stimulus coming to a halt, the Aussie Dollar advanced against its peers in today’s trading session, as data from China continued to show that the nation’s economic recovery is gaining traction. The HSBC PMI for December showed that the nation’s manufacturing activity expanded at the fastest pace in nineteen months, thereby offering strength to the belief that the Chinese economy is well poised to end the recent trend of seven straight quarters of slower growth. On the domestic front, data showed that the annual private sector credit growth in Australia slowed marginally for November. Manufacturing and services sector data from Australia due for release during the course of the week is expected to shed more light on the Australian economy. However, domestic cues are expected to take a back seat, given the wider implication of the US budget talks on the currency market.