Greece Imminent Default

A series of disconcerting events across Europe have significantly affected trading sentiment in Sterling and the Euro today. The Greek Prime Minister’s warning of his nation’s potential “disorderly default” in March, poses many potential issues for the entire global economy. After yesterday’s subdued German bond sales, market participants are keenly eyeing French bond auctions scheduled for later today. In the UK, data just released indicates an improvement in the services PMI. This follows upbeat manufacturing and construction activity figures released earlier in the week.

Pound Sterling – UK Markets

The Pound has strengthened against the Euro and has lost ground against the US Dollar. Data just released indicates that the services PMI climbed to a reading of 54 for December, compared to November’s reading of 52.1. This follows yesterday’s better-than-expected construction PMI, consumer credit and mortgage approvals statistics. These positive updates have strengthened market perception that the nation’s economy is gaining traction. This comes on the back of strong manufacturing numbers released earlier on Tuesday. We expect the Pound to take direction against the Euro from the outcome of French bond sales later today.

US Dollar – US Markets

The US Dollar has strengthened against the Pound and the Euro this morning after negative news flow from Europe led investors to flee high yield currencies. Yesterday’s lower-than-expected factory orders data did little to help stem the pressure on high yield currencies. Ahead of December’s payrolls report, due tomorrow, today’s market focus will be on the ADP employment report, which is expected to show that labour market conditions are gradually improving. Additionally, the ISM non-manufacturing composite index, slated for release later today, is anticipated to post an improvement for December. We expect the US Dollar to cement its gains against the majors today amid a broadly “risk-off” trading sentiment prevailing in the market.

Euro – European Markets

The Euro is trading lower against the majors after the Greek Prime Minister, Lucas Papademos, warned that Greece may face an economic collapse as soon as March. Making matters difficult for the Euro are reports suggesting that the Spanish government is considering applying to the IMF and the EU’s rescue fund for loans to finance a restructuring of the nation’s banking sector. Additionally, German retail sales figures, released earlier today, have disappointed investors. The fragility of the European banking sector was brought to the fore after the overnight deposit facility at the ECB reached a record high on Tuesday while Italy's UniCredit placed a €7.5 billion rights issue at a steep discount. Today markets are keenly awaiting the outcome of French bond auctions worth €8 billion after yesterday’s German sale of 10-year bonds attracted weaker demand.

Other Currencies – Highlights

The Yen has breached the crucial 99.00 level against the Euro this morning, amid rising concern over the ability of European governments to refinance their public debt. Additionally, disappointing events unfolding in the Eurozone have further enticed investors to move towards safe haven currencies. On the economic front, the monetary base in Japan climbed 13.5% annually to ¥1.18 trillion for December. With all eyes set on the outcome of the crucial bond sales in France and market sentiment trending weaker, we expect the Yen to advance against the high yield currencies today.