UK Debt Continues to Mount

The public borrowing figures continue to portray a worrying picture, as UK’s borrowings continues to climb, albeit at a slow pace, raising questions over the efficacy of the government’s austerity programme and further exposing the nation to the risk of losing its “AAA” rating. However, recent strong economic data has elevated the hype surrounding next week’s GDP data. Although yesterday’s meeting of the Eurozone finance ministers offered signs of the region’s policymakers bridging their differences, the reluctance to outline their plans to tackle fiscal woes in Spain and Greece once again prompted traders to seek shelter in the greenback. The news flow from the second day of the meeting will drive market sentiment today.

Pound Sterling – UK Markets

The Pound is trading below the 1.61 mark against the US Dollar, as traders embraced a cautious approach in the build up to the public sector finance data today. As per the latest figures, public sector net borrowing in the UK continued to climb at a steady pace, leaving little hope for the Chancellor to meet his fiscal targets for the current year which continues to threaten the UK’s top notch credit rating. Additionally, positive news flows from the EU leaders meeting has kept Sterling in check against the Euro. Most of the recent major economic indicators in the UK have suggested that the British economy is steadily gathering momentum and has increased the possibility of the economy escaping a recession in the third quarter. Retail sales in the UK continued to grow at a stable pace, despite the influence of the London Olympics tapering off, while the domestic labour market received a boost after the unemployment rate slipped below the 8% mark. Against this backdrop, next week’s GDP data will remain the key focus to gauge if the changing economic scenario supports the nation in pulling the economy out of a recession.

US Dollar – US Markets

The US Dollar notched up some gains against its major peers in the latter half of yesterday’s trading session, as the EU finance ministers meeting yielded little on plans to tackle debt problems emanating from the peripheral nations. However, the EU ministers reached an agreement towards establishing a single banking supervisor for the Eurozone. Meanwhile, jobless claims rebounded sharply from multi year lows, confirming that the preceding week’s data was an aberration, broadly due to seasonal adjustments at the change of the quarter. However, the ISM data validated an improvement in the manufacturing sector, supported by the Philadelphia Fed manufacturing index which climbed more than expected for October, ending three months of contraction. Existing home sales data due today is expected to shed more light on the housing sector in the US. Moreover, developments from the Eurozone finance ministers meeting are also anticipated to garner attention in today’s session.

Euro – European Markets

The Euro began yesterday’s trading session on a firm footing, as Spain’s borrowing costs declined and the nation sold more than its maximum target at a bond auction held yesterday. However, the common currency fell against the US Dollar later in the session, as the EU finance ministers came up with no landmark initiatives in dealing with the debt troubles in Spain and Greece. Meanwhile, the EU leaders have agreed to have the legal framework in place for the Eurozone to establish a banking regulator by the end of the year. Following the meeting between the region’s finance ministers, the German Chancellor, Angela Merkel, proposed a new European aid fund to bolster the region’s competitiveness. With the legal framework for a banking union agreed on, a French report indicated that recapitalisation of troubled banks by the ESM could begin in the first quarter of 2013, but a German government official rejected such claims. With the Euro looking for direction against the majors this morning, traders are expected to keep an eye on further cues from the second day of the EU summit.

Other Currencies – Highlights

The Japanese Yen declined against its major peers in today’s session, as traders shunned the Yen ahead of the Bank of Japan’s monetary policy meeting due later this month. Traders continued to fret the possibility of the BoJ embracing fresh stimulus measures at the meeting. The central bank’s policymakers are also expected to release updated economic projections for 2012 and 2013. Meanwhile, on the data front, an index measuring all industry activity in Japan recovered for August while the Japanese leading and coincident indices were revised marginally lower for August. Traders await a flurry of economic data from Japan next week. The trade balance and department sales figures are expected to provide insights into the latest economic trends while the BoJ’s policymakers are expected to keep a close eye on the inflation data due in the latter half of the next week. In today’s session, traders are expected to stay focused on the developments from the Eurozone finance ministers meeting.