UK optimism

After last week’s strong PMI numbers there seems to be more buoyancy in the UK economy, as is evidenced by a rise in the like-for-like retail sales figures for December. Additionally, a marginal improvement in the RICS house price balance index has given rise to expectations of a broad-based recovery. Meanwhile, market optimism ahead of today’s meeting between Angela Merkel and Christine Lagarde has improved trading sentiment towards high yield currencies. Yesterday’s much awaited German-Franco talks ended with no major news bytes. The leaders, as on previous occasions, merely reiterated their commitment towards the measures agreed at the last summit.

Pound Sterling – UK Markets

The Pound is holding against the Euro, bouncing around the 1.207 mark. Against the US Dollar the Pound is trading higher after data from the BRC revealed a rebound in UK retail sales for December. A marginal improvement in the RICS house price balance index supported gains in Sterling. On the flip side, the British Chambers of Commerce (BCC), in its latest quarterly survey, warned that at least one quarter of contraction was very likely in the first half of 2012. The BCC also stressed that the government act to repair the problems caused to business confidence on account of the Eurozone debt crisis, or risk an even greater setback to the economy. In the absence of any significant economic releases today Sterling is likely to take cues from Eurozone developments.

US Dollar – US Markets

The US Dollar has edged lower against its major counterparts this morning as traders increased their position in riskier assets. This risk appetite is due to optimism ahead of the meeting between the German Chancellor, Angela Merkel, and the IMF Managing Director, Christine Lagarde. Meanwhile, yesterday’s US data continued to point towards upbeat consumer morale. Consumer credit surged by $20.4 billion for November, surpassing market expectation for a $7.6 billion increase. Market participants are now eyeing wholesale inventories data, slated for release later today, which is expected to indicate a slowdown in growth for November.

Euro – European Markets

The Euro has gained against the US Dollar after data released this morning indicated a greater-than-expected rise in French manufacturing and industrial production for November. Today the Greek €2.5 billion bills auction is set to attract market attention. Merkel has already cautioned that a potential collapse of Greek rescue negotiations poses the most immediate threat to the Euro and the global economy. We expect the Euro to be volatile ahead of the outcome of the meeting between the German Chancellor and the IMF Managing Director. Yesterday’s Merkel-Sarkozy meeting ended on a positive note with reports suggesting the likely completion of their new budget rulebook is ahead of schedule.

Other Currencies – Highlights

The Swiss Franc is trading higher against the Euro following yesterday’s resignation of the Swiss National Bank's (SNB) Chairman, Philipp Hildebrand, amid controversy over currency trades carried out by his wife last year. The Vice Chairman, Thomas Jordan, has been appointed as the interim Chairman of SNB. The central bank has indicated its commitment to defend the CHF 1.20 floor on the Euro-Franc exchange rate set in September. Concerns over a possible revision of the Euro-Franc exchange floor persist as last week’s data indicated that the deflationary trend continued for December. Additionally, yesterday’s data, indicating a higher-than-expected rise in the Swiss unemployment rate, raised concerns over the health of the Swiss economy.