Focus Shifts to the US

With much of the issues about the Eurozone debt crisis put on the backburner, uncertainty surrounding the US “fiscal cliff” has grabbed the centre stage. With a key US policymaker raising questions about the efficacy of the ongoing negotiations, traders continue to fret the possibility that brinksmanship over contentious issues could jeopardise the chances of reaching a consensus. Meanwhile, Greece is still not out of the woods, as the nation needs to complete a debt buy back for unlocking the funds promised by its international creditors. At home, weak UK economic growth prospects chalked out by both the BoE Governor and the OECD has cautioned traders that all is not well in the economy.

Pound Sterling – UK Markets

The Pound nudged higher against the Euro in yesterday’s session, aided by the confirmation of a 1% sequential GDP growth in the UK for the third quarter, providing relief to some investors who had braced themselves for a weaker reading. Moreover, uncertainty over Greece’s bond buying programme also strengthened the Pound against the Euro. Meanwhile, lower risk appetite among market participants on account of worries surrounding the US “fiscal cliff” negotiations has steered Sterling marginally lower against the greenback in today’s session. Additionally, the OECD poured cold water on hopes of a UK economic recovery after it forecast the British economy to contract by 0.1% this year, as compared to its previous projection of a 0.5% growth. Similar concerns were raised by the BoE Governor, Mervyn King, as he opined that chances of a rapid recovery in 2013 and 2014 are bleak and added that QE was not leading to an expansion in demand and inflation. Against this backdrop, George Osborne’s Autumn statement scheduled next week is likely to shed some light on the government’s stand amid prospects of weaker growth.

US Dollar – US Markets

A deal for extending the existing fiscal measures remains evasive as the Senate majority leader, Harry Reid, indicated that there was lack of progress among Democratic and Republican lawmakers for agreeing on a deal to avert the crisis. The US Dollar continued to climb against the Euro and Sterling this morning, as traders sought refuge in safe haven currencies in the midst of worries about the “fiscal cliff” in the US. Meanwhile, rate setters in the Fed remained divided over the future course of monetary stance that needs to be adopted by the central bank. The Dallas Fed President, Richard Fisher, has called for the Fed to set a limit on the amount of assets it plans to buy, while the Chicago Fed President, Charles Evans, urged the Fed to maintain interest rate at near zero levels until unemployment rate falls to at least 6.5%. On the macro front, data released yesterday revealed that consumer confidence rose to a multiyear high, while the Richmond Fed’s manufacturing index unexpectedly climbed. Durable goods orders data also surprised on the upside. Today’s Beige Book survey and new home sales are likely to shed more light on the recovery in the US economy.

Euro – European Markets

The Euro declined against its major peers yesterday, with the 1.30 mark posing a strong barrier for the Euro-US Dollar pair, as “risk off” sentiment prompted traders to switch to safe haven currencies. Persistent concerns about the “fiscal cliff” issue in the US continued to propel concerns that the gridlock among the US policymakers could jeopardise a global economic recovery. To add to the woes, Greece needs to complete a debt buy back before it becomes eligible to seek aid from its international creditors. Against this backdrop, the crisis in Greece’s banking sector could get murkier, as reports suggest that Greek banks could be forced to tender their Greek sovereign bonds at a low price, forcing them to forego any future profits. Meanwhile, the OECD lowered its global economic growth forecast for 2012 and 2013, as the crisis in the Eurozone is expected to weigh on the global economy. In today’s trading session, markets are expected to keep a close eye on the German inflation figures, given the possibility of the ECB lowering its benchmark interest rate going forward.

Other Currencies – Highlights

Yesterday, risks emanating from events surrounding the global economy continued to cloud the world economic outlook and weighed on the Aussie Dollar. Traders shunned high yield currencies after a key policymaker in the US indicated that a deal for resolving the “fiscal cliff” issue remains evasive. Moreover, concerns about the crisis in Greece persisted, as the nation is expected to formulate plans for completing a debt buy back in order to attain the next tranche of aid from its creditors. In today’s trading session, the Aussie Dollar is trading almost unchanged against the greenback, as traders remained on the sidelines amid doubts about the recent Greek aid deal and the US political brinkmanship. Additionally, growth worries prevail after the OECD indicated that a major global recession cannot be ruled out. With little on the domestic economic calendar during this week, market attention is expected to remain tuned to the Reserve Bank of Australia’s monetary policy meeting scheduled next week.