US Stops Close to the Edge

The first trading session of 2013 has kick started with strong gains in high yield currencies, largely supported by the bipartisan deal reached by US lawmakers to avert the fiscal cliff. However, with a majority of Republicans voting against these measures, a showdown for raising the borrowing limit that expires in late February 2013 seems on the cards. Meanwhile, Britain continues to tiptoe along the path of recovery, as data just released showed that the nation’s manufacturing activity moved into the expansion phase for December. In contrast, manufacturing indicators from other European nations offered no reason to rejoice. Traders are likely to eye the equivalent figure across the Atlantic in today’s session for further cues.

Pound Sterling – UK Markets

With policymakers in the US taking necessary steps to avert a major risk to the economy, the Pound staged remarkable gains against the greenback and successfully moved above the 1.63 mark. Sterling also received a boost after data indicated that the nation’s manufacturing activity improved for December, despite the prevalent weakness in other European economies. However, the Pound dipped against the Euro as “risk on” sentiment among traders weighed on Sterling. With the latest manufacturing data confirming belief that the economic recovery in the UK continues to gather momentum, traders will be eyeing services and construction sector data in the next two trading sessions to gauge the health of the recovery. Meanwhile, a survey from Halifax revealed that home owners in the UK are confident of further price increases in 2013. Apart from key domestic economic releases scheduled for release tomorrow, traders are expected to stay focused on macro data from the US and the Eurozone due later in today’s trading session.

US Dollar – US Markets

The House of Representatives supported a deal proposed in the Senate to prevent the US economy from going over the cliff. This has ensured that the US would not bear the brunt of the bulk of measures that were scheduled to trigger following the expiry of the fiscal stimulus, leading the Dollar to trade under pressure against its major counterparts this morning. The deal has raised tax rates on individuals with incomes of more than $400,000 and on household incomes of over $450,000 and has also delayed automatic spending cuts by two months. Although a bipartisan deal has been reached, unfolding events in the political arena will continue to receive market attention, as the US Treasury expects the government to hit the debt ceiling in late February 2013. With a majority of Republicans voting against the current measures, further stalemates among policymakers cannot be ruled out. Today’s ISM manufacturing data is expected to set the stage for a flurry of important economic indicators during the course of the week. The manufacturing indicator is expected to shed light on the strength of the recovery following the devastating impact of Hurricane Sandy.

Euro – European Markets

The Euro has staged a rebound against it peers and moved closer to the 1.33 mark against the greenback, as policymakers in the US reached a bipartisan deal to prevent the tax breaks and spending cuts coming into effect. However, the manufacturing sector in the Eurozone continues to emit worrying signs, as latest PMI data showed that activity continued to contract in the peripheral and core Eurozone nations for December. With the ECB set to meet next week, the CPI data from Germany will be closely watched, as traders continue to fret over the possibility of the ECB pushing deposit rates into negative territory. With policymakers in the US doing the necessary to avert a catastrophe, the focus is once against expected to shift to the Eurozone’s political arena for further cues. With the single currency going strong against the greenback, traders will be all eyes to today’s macro releases from Europe and the US for further direction.

Other Currencies – Highlights

The Japanese Yen has declined against its peers in today’s session, as traders shunned safe haven currencies after the House of Representatives in the US approved a bill to prevent much of the fiscal stimulus from expiring. Meanwhile, with financial markets in Japan closed for the major part of the week, cues emanating from overseas markets are likely to determine the trend for the Japanese Yen during this week’s session. Meanwhile, the stance of the Bank of Japan’s policymakers will be closely watched, as the recently elected Japanese Prime Minister, Shinzo Abe, has threatened to change the law which guarantees the central bank’s independence, if the Bank of Japan fails to adopt a 2% inflation target. With no major domestic macro data due this week, today’s manufacturing data and Friday’s employment data from the US will remain the key trend setters for safe haven currencies.