US Policymakers Tackle the ‘Cliff’

Worries surrounding the “fiscal cliff” have subsided considerably after key policymakers from the political arena expressed confidence on reaching agreement, thereby brightening prospects for high yield currencies in yesterday’s session. The House Speaker indicated that Republicans could broker a deal over the issue, with the US President expecting to seal a deal before Christmas. Positive news flow from the US is expected to continue, as third quarter GDP figures are expected to be revised upward later today. Additionally, concerns surrounding the German economy eased, as the number of unemployed grew less than expected for November. The Pound will be eyeing the CBI’s retail sector data and the Financial Stability Report for further direction.

Pound Sterling – UK Markets

After beginning on a weaker note, the Pound staged a recovery in yesterday’s trading session and successfully regained the 1.60 mark against the US Dollar, as fears of a political gridlock in the US abated after policymakers offered soothing comments over the prospects of reaching a deal to avoid the “fiscal cliff”. However, with little news flow of interest thereafter, Sterling is hovering in a tight range against the US Dollar this morning, with losses against the Euro. Although minutes of the BoE’s latest monetary meeting showed that there were not many takers for further QE in the rate setting committee at this juncture, the possibility of the BoE embracing such monetary tools cannot be ruled out, as the BoE Deputy Governor, Charlie Bean, echoed similar views. Meanwhile, data showed that M4 money supply continued to decline, while mortgage approvals for house purchases hit a ten month high, boosted by the BoE’s Funding for Lending programme. Markets will keep an eye on the CBI retail sales report later today, which is expected to offer clarity regarding the current trend in the retail sector, while the BoE’s Financial Stability Report will shed some light on the nation’s financial system.

US Dollar – US Markets

Indications by policymakers in the US that a deal to avert a fiscal crisis in the US remains in the offing saw investors turn away from the greenback, reversing early session gains against the majors in yesterday’s trading session. The top Republican in Congress, John Boehner, sparked a new wave of optimism after he indicated that Republicans could broker a deal with the White House to prevent austerity measures from coming into effect. Risk appetite was further boosted after Barack Obama took the baton from Boehner by voicing optimism that an agreement could be reached before Christmas. Meanwhile, the Fed is seen continuing with its ultra loose monetary policy stance after its latest Beige Book survey warned about headwinds to the economy emanating from the impact of Hurricane Sandy and fears about the “fiscal cliff”. However, expectations of a substantial upward revision to third quarter GDP growth figures, largely due to stronger than initially reported international trade and inventory data, could keep the argument for QE finely balanced. Apart from today’s GDP data, pending home sales and jobless claims figures will be closely watched as further indication of the overall health of the economy.

Euro – European Markets

The Euro continues to recover from yesterday’s lows against the majors this morning, as policymakers in the US appear to be approaching a deal for extending tax cuts and other stimulus measures, strengthening hopes that a crisis might be averted. Additionally, the German labour data showed signs of improvement, with the number of unemployed rising less than expected for November. Meanwhile, yesterday’s data revealed that consumer price inflation in Germany declined for November, offering room to the ECB Chief, Mario Draghi, to lower interest rates going forward. However, the ECB will be watchful of inflation readings from other nations before taking the final call. In today’s trading session, the business climate index from the Eurozone will be eyed closely to gauge the mood among business houses. Today’s market trend is broadly expected to be influenced by data from the US and the Eurozone. However, traders should be cautious, as any new reasons to be negative about Greece, Italy or Spain could limit the upside for the Euro against the majors.

Other Currencies – Highlights

The Swiss Franc has advanced against the US Dollar this morning, as data revealed that Switzerland’s third quarter GDP grew at a stronger than expected pace, with private and public consumption contributing positively to economic growth. The Swiss economy emerged from a contraction and grew 0.6% sequentially in the third quarter. Meanwhile, the Swiss National Bank Chairman, Thomas Jordan, reiterated his stance that the central bank would continue to defend its Euro-Swiss Franc floor price for the foreseeable future, as he opined that the higher Swiss Franc was still weighing on many Swiss companies. With no major domestic economic releases due today, traders will keep a track on developments from Europe and the US for further direction to risk appetite.