Greece on thin ice

Debt issues in Greece seem to have intensified after Eurozone finance ministers rejected the offer from private bond holders to help restructure Greek debt. Meanwhile, data just released has indicated an improvement in Eurozone and German manufacturing activity. On the domestic front, data just out has shown that public sector net borrowing fell more than expected for December. Sterling’s future course is likely to be heavily influenced by tomorrow’s fourth quarter GDP numbers and the BoE minutes of the last rate setting meeting.

Pound Sterling – UK Markets

The Pound is trading sideways this morning, currently hovering around the 1.1950 and 1.5540 levels against the Euro and the US Dollar respectively, as traders await a key set of releases due tomorrow. Data just released indicated that public sector net borrowing declined at a greater–than-expected rate for December. BoE policymaker, Adam Posen, has stated that the central bank would increase its bond purchase target next month if new forecasts for growth and inflation justify the expansion of stimulus again. Comments from Posen have increased market speculation over further stimulus as inflation has eased, while the fourth quarter GDP numbers, slated for release tomorrow, are expected to reveal a contraction in the British economy. Additionally, traders await the release of BoE minutes tomorrow which will aid them to gauge the stance of policymakers towards stimulus and growth.

US Dollar – US Markets

Yesterday the Euro-US Dollar pair broke the key 1.3000 level after the EU Economic and Monetary Affairs Commissioner, Olli Rehn, stated that the region’s finance ministers had nearly finalised their treaty on an improved stability mechanism. However, the pair has moved sideways in today’s trading as traders remain wary of any negative news flow from the Eurozone. With Eurozone finance ministers rejecting the offer from private bondholders, a near term solution to the Greek debt issue seems far-fetched. With recent manufacturing numbers across the US showing an improvement, markets expect the Richmond Fed’s manufacturing index, slated for release today, to climb for January. Markets are also likely to focus on the US Federal Reserve’s two day monetary policy meeting beginning today. Expectations surrounding the FOMC meeting and Greek negotiations will dominate investor sentiment and provide further direction to the US Dollar.

Euro – European Markets

The Euro has made incremental gains against both the Pound and the US Dollar in early morning trading. The stalemate between Greece and its private creditors continued as Eurozone finance ministers rejected the offer made by private bondholders to help restructure Greek debt. Adding to the woes Luxembourg’s Prime Minister, Jean-Claude Juncker, indicated that talks aimed at relieving Greece’s debt burden were “off track”, while ratings major, S&P, downgraded more major French banks. However, trading sentiment was buoyed by a notable improvement in Eurozone and German manufacturing and services PMI’s for January. These positive numbers have fuelled market speculation that liquidity operations undertaken by the ECB are showing a positive impact on the region’s economy. With industrial new orders being the only release on tap today the Euro’s movement is likely to take cues from Spanish bill auctions due later today.

Other Currencies – Highlights

The Yen is trading lower against the Pound and the US Dollar this morning. The Bank of Japan (BoJ) has cut its economic growth forecast for fiscal 2012 to 2% from the 2.2% projected previously. Meanwhile, as was widely expected, Japanese interest rates were held at near zero. The revision to growth forecasts clearly reflects a mounting concern that the European debt crisis may lead to a slowdown in Japanese exports. Echoing similar sentiment the Telegraph has indicated that; in data scheduled for release tomorrow, Japan is set to record its first annual trade deficit since 1980.