King's Next Move Awaited

Although the odds are stacked against the BoE inducing fresh stimulus, the latest round of economic data and mixed signals from the BoE policymakers have kept alive a slight possibility of central bank intervention. Meanwhile, the ECB’s meeting is expected to be a low key affair, with the ECB likely to leave key interest rates untouched. Market attention is expected to focus on Mario Draghi’s press conference to decipher the potential of Spain seeking a bailout. Yesterday’s session witnessed high yield currencies reversing their initial session gains, as traders were jolted back to reality by the looming US “fiscal cliff” and aggravating situation in the Eurozone.

Pound Sterling – UK Markets

The Pound moved higher against the Euro in yesterday’s trading session, as weakness surrounding the core Eurozone economies and the European Commission’s decision to lower the region’s economic growth forecast highlighted the fragile state of affairs in the single currency union. Additionally, traders remained cautious, as the outcome of the US election rekindled fears about the “fiscal cliff”. However, markets are expected to switch their attention to domestic cues, as the BoE is expected to announce its monetary policy decision later today. The BoE is likely to opt narrowly against another round of liquidity injection, as the British economy emerged successfully out of the double dip recession. However, weak PMI and industrial output data and subdued inflationary pressures could play on the minds of the policymakers. With Sterling trading in a fairly tight range against the majors this morning, traders are also expected to keep an eye on the monetary policy meeting in the Eurozone and economic releases from the US for further direction.

US Dollar – US Markets

The underlying threat of the “fiscal cliff” dragging the US back into an economic mess has severely watered down the initial excitement following the President Obama’s re-election. The US Dollar garnered traction against the majors in yesterday’s trading session, as traders embraced the widely held belief that the US economy remains perched on a shaky ground, with the latest elections offering little hope to dispel these concerns. Fitch also offered a reality check for the US, warning a credit rating downgrade in 2013 if the “fiscal cliff” is not avoided. However, traders could breathe a sigh of relief after the Greek Parliament narrowly approved the required set of austerity measures for securing further aid. This has limited further gains in the US Dollar against both the Euro and the Pound in today’s session. With the latest non-farm payrolls data showing robust growth in hiring, traders are expected to keep a close eye on today’s jobless claims figures to gauge if the upward momentum in hiring persisted. With trade balance figure being the other major release from the US, traders are expected to keep focus on monetary policy meetings in Europe for seeking direction for currency markets.

Euro – European Markets

The Euro declined against its major peers in yesterday’s trading session after the European Commission lowered the Eurozone economic growth forecast to 0.1% for the next year. Moreover, prospects of the German economy sliding into a recession remains a legitimate threat, as German industrial production continue to slide and exports continue to decline for September. The same concerns were also evident in the ECB Chief’s comments yesterday, wherein he opined that the region’s debt crisis is hurting Germany’s economic growth. However, the Euro has limited its losses against the majors today after the Greek Parliament passed the highly anticipated set of austerity measures, paving way for the Eurozone finance ministers to take essential measures to dispatch the next tranche of aid to Greece in their meeting next week. The focus today is expected to shift towards the ECB monetary policy meeting and the subsequent press conference for further direction to the Euro against the majors.

Other Currencies – Highlights

The Japanese Yen is looking for direction against its major peers in today’s trading session following a mixed set of economic data from Japan. Data released earlier today revealed that Japan’s trade deficit narrowed for September, offering some relief that the Japanese economy may avoid slipping into a recession. However, machine tool orders posted a larger than expected decline for September, clouding worries surrounding the nation’s exports. Additionally, the latest Eco Watchers survey revealed that outlook for the Japanese economy weakened sharply for October. With no major domestic economic release scheduled for this week, markets are expected to keep track of the leadership change in China and developments in the Eurozone for further direction. We believe that prevalent fears surrounding the “fiscal cliff” in the US and economic growth concerns in the Eurozone should keep a tight lid on the downside in the Yen against the majors.