Early Christmas for UK Retailers

The retail sector in the UK remained resilient to economic shocks, as the CBI survey yesterday revealed suprising growth in retail sales volumes, supported by burgeoning consumer confidence for November. However, the picture is not rosy across the board, as a BoE report showed that the British banks would need to make higher provisions on their loans. Although recent developments highlight that a deal to avert the US “fiscal cliff” remains in the offing, the likelihood of a logjam cannot be ruled out on account of mixed signals from policymakers. Despite macro data from both the US and Europe offering some respite yesterday, we expect heightened volatility in currency markets going forward due do dilly-dallying in the US budget talks.

Pound Sterling – UK Markets

Sterling garnered some strength against the US Dollar yesterday, as encouraging economic data from the US strengthened belief that the global economy continues to move along the path of recovery. Additionally, the UK’s retail sector showed promising signs, despite the weakness seen in October, as the CBI survey showed that British retail sales in November rose at the fastest pace since June 2012. An unexpected jump in the GfK consumer confidence index for November commensurate the upbeat morale among British consumers. However, the domestic financial sector remained vulnerable to economic shocks, as the central bank’s Financial Stability Report showed that major lenders in the UK would need to make extra provisions on consumer loans and the European debt. This has indeed raised market interest in the BoE’s monetary policy meeting scheduled next week. With Sterling unlikely to have independent moves in today’s session on account of a light domestic economic calendar, traders will keep an eye on overseas cues, especially the news flow emanating from the “fiscal cliff” negotiations, for further direction.

US Dollar – US Markets

Although the US policymakers sang in chorus that a deal on extending the fiscal measures would be reached very soon, there is an underlying threat of a repeat of the brinksmanship shown by policymakers during the debt ceiling negotiations last year. The Speaker of the US House of Representatives, John Boehner, stated that no substantive progress was made for agreeing on a budget deal, just less than a day after he voiced his optimism about reaching a pact. Against this backdrop, the US Dollar could remain under the shadow of the news flow from the US budget talks. However, a raft of upbeat economic data from the US continued to show that the US would propel global growth, with the third quarter GDP growth revised upwards. Jobless claims also fell last week, recovering from the initial spurt seen in the aftermath of Hurricane Sandy, while sales of pending homes maintained its upward trajectory. Though, the US Dollar continues to trade under pressure against the majors this morning, personal consumption and Chicago PMI data later today, coupled with any news regarding the “fiscal cliff”, could sway market sentiment.

Euro – European Markets

The Euro staged a recovery against the US Dollar and nudged above the crucial 1.30 mark yesterday, as easing borrowing costs in Italy during an auction offered a fillip to the single currency. Additionally, the Euro was helped by the German employment numbers which surprised on the upside and broadly better Eurozone confidence indices. The Euro is trading higher against both the Pound and the greenback this morning despite data revealing a fall in the German retail sales for October. Meanwhile, the peripheral Eurozone economies continue to reel under pressure, as the OECD urged Spain to quickly fix its banking crisis in order to avert the “substantial risk” of being cast away from external financing, while the Italian unemployment rate spiraled to higher levels. A deal to release Greece’s next aid tranche also remains clouded after the IMF stated that it would not disburse funds unless Greece delivers on its promise for carrying out the promised debt buyback scheme. Markets participants are likely to remain focused on the Eurozone CPI and unemployment data slated later today for hints on the prospects of an interest rate cut by the ECB in the first quarter of next year.

Other Currencies – Highlights

The Japanese Yen has declined against its major peers in today’s trading session after the Japanese cabinet approved a $10.7 billion stimulus package in order to revive growth. Additionally, the leader of Japan’s Liberal Democratic Party, Shinzo Abe, who is widely expected to take control of the cabinet after the next month’s elections, reaffirmed his call for the Bank of Japan to inject funds into the financial system until inflation reaches the 2% mark. Against this backdrop, further monetary stimulus remains on cards, as data today revealed that the deflationary situation persisted in Japan for October. Manufacturing sector activity offered mixed signals, as monthly industrial production data showed an unexpected recovery, while the manufacturing PMI slid deeper into the contraction territory. However, the labour market remained impervious to events in the economy, as data revealed that unemployment rate held steady at 4.2%. With no further domestic economic releases on offer today, traders will set their sights on developments in the US and the Eurozone for further direction.