Optimism on Europe

As we approach the end of the week there seems to be increasing optimism towards developments in the European debt market, seemingly owing to successful bond auctions in Spain and Italy. Although the ECB kept its monetary policy unchanged yesterday, encouraging comments from the ECB President, Mario Draghi, helped to turn the tide in favour of high yield currencies. At home, data just released has indicated that producer price inflation eased for December. This follows yesterday’s “status-quo” monetary stance from the BoE and downbeat industrial production numbers.

Pound Sterling – UK Markets

The Pound is clawing back against the Euro following yesterday's steep drop, but has shed its early gains against the US Dollar this morning. At its monetary policy meeting yesterday the BoE refrained from taking additional stimulus measures. Market speculation is that the central bank may resort to further stimulus at its next meeting, following recent disappointing industrial output numbers and NIESR’s assessment that the British economy registered a meager 0.1% growth for the fourth quarter. Despite this gloomy scenario the Chancellor of the Exchequer, George Osborne, insisted that there were “signs” of a recovery in the economy. Data just released reveals that producer price inflation eased for December, strengthening market perception for additional easing in the UK.

US Dollar – US Markets

The US Dollar lost early morning ground against its major counterparts after jobless claims rose to a six week high last week and retail sales growth disappointed. This has strengthened market fears that a greater-than-usual increase in temporary holiday hiring may have skewed December payroll numbers to the upside. Moreover, Moody's indicated that theunemployment rate in the US is likely to remain above the 8% mark in 2012. However, the US Dollar is beginning to regain ground as optimism in Europe begins to subside. Markets are expected to closely monitor consumer sentiment data, slated for release today, as it will help to gauge post-Christmas consumer morale in the US. Statistics scheduled for release today are expected to indicate that the US trade deficit widened for November. Risk appetite will be driven by the Italian auction scheduled today.

Euro – European Markets

Yesterday, the Euro strengthened against the US Dollar and the GBP after the positive response to Mario Draghi’s comment that a credit crunch had been averted and that there are signs of stability in the region’s growth. This has fuelled market speculation that the recent liquidity operations, undertaken by the ECB, are showing results. The ECB held its benchmark interest rate unchanged at 1%. Additionally, lower borrowing costs for Italy and Spain, at their bond auctions yesterday, further aided optimism towards the Euro. However, growth and sovereign debt concerns continue to persist as industrial output in the Eurozone contracted for the third consecutive month for November. Meanwhile, reports have indicated that talks between the Greek government and its private creditors failed to yield an agreement. With the Eurozone trade balance being the only economic release on tap today, the Euro is expected to be trade on cues from the €3 billion Italian bond auction later today.

Other Currencies – Highlights

The Australian Dollar is trading higher against the US Dollar, buoyed by upbeat bond auctions in Italy and Spain yesterday. Additionally, Mario Draghi’s comment that efforts to address the Eurozone debt crisis seem to be yielding results, has further aided trading sentiment towards the high yield currencies. Easing Chinese inflation has led to expectations of monetary policy easing in China, one of the largest trading partners for Australia. The Italian bond auction later is likely to set the tone for risk appetite today.