Markets await Merkozy Magic !

Market focus today is on the crucial Merkel-Sarkozy meeting which will set the tone for the finance ministers’ meeting and leaders’ summit later this month. Anticipation of a positive outcome to the summit has led traders to shrug off the credit rating downgrade for Hungary and reports that the IMF is losing confidence in Greece's ability to reform. Several bond auctions scheduled for the week ahead are expected to keep trading volatile. In the UK the Lloyds employment confidence report, released this morning, adds to ongoing concerns over employment prospects.

Pound Sterling – UK Markets

The Pound has weaken against the Euro and is steady against the US Dollar ahead of key economic releases later in the week. Data released earlier this morning indicated that the Lloyds employment confidence index remained unchanged at a reading of -75 for December. Data scheduled for release later this week is expected to reveal a further contraction to annual British industrial production for November. Additionally, producer price inflation in the UK is expected to ease for December, further strengthening claims of BoE policymakers that inflation would ease slowly. Meanwhile, markets are expected to closely monitor NIESR’s GDP estimate for further cues on the health of the UK economy. The BoE, in its monetary policy meet on Thursday, is expected to leave its benchmark interest rate and asset purchase target unchanged at current levels. We expect the Pound to track the outcome of these important economic events this week.

US Dollar – US Markets

The US Dollar is trading lower against the majors this morning as traders await the outcome of the French President and the German Chancellor’s meeting in Berlin later today. Losses in the US Dollar were limited amid expectations of improving economic fundamentals in the US and persistent concerns over the European debt crisis. Market speculation over further easing in the US was dampened after the Federal Reserve Bank of St. Louis President, James Bullard, opined that the Fed is not likely to initiate a new round of bond purchases for at least the short term, following “encouraging” jobs data. On Friday, data indicated that the US unemployment rate declined to 8.5% for December, its lowest level in almost three years. With a light economic calendar today we expect the US Dollar to take direction from the outcome of the Merkozy meeting.

Euro – European Markets

The Euro has gained against the Pound and the US Dollar ahead of the meeting between Nicolas Sarkozy and Angela Merkel,in which they are expected to finalise details of a deal to increase fiscal co-ordination in the Eurozone. Markets have taken negative Eurozone developments in its stride. Reports over the weekend have suggested that the IMF has serious concerns over Greece’s ability to resolve its debt crisis, while Fitch downgraded its sovereign debt rating on Hungary to “Junk” status. Markets are now keeping a close eye on German industrial production data, slated for release today, which is expected to be largely negative. This comes on the back of a higher-than-expected drop in German industrial orders for November. Traders are also eyeing Spanish and Italian debt auctions later this week, with Italian bond yields hovering above 7%.

Other Currencies – Highlights

The Canadian Dollar is trading lower against the Euro and Sterling after data released on Friday pointed towards further deterioration in the Canadian job market. The unemployment rate in Canada unexpectedly climbed to 7.5% for December, from a level of 7.4% recorded in the previous month. However, losses in the currency were capped after data from a Nanos Research poll indicated that Canadian consumer confidence recovered in the fourth quarter, from a two-year low on optimism over improvement in real estate prices and the global economy. However, data slated for release later today is expected to indicate a fall in Canadian building permits for November.