Back to Reality

The initial optimism following the US budget deal has steadily waned, as the IMF and major credit rating agencies have expressed reservations on the recent fiscal cliff, citing that the deal does not provide a basis for a meaningful improvement in the government's debt ratios over the medium term. Back at home, the construction PMI reading has come in worse than expected for December and should limit the upside for Sterling in today’s session. The services PMI data scheduled tomorrow should throw more light on the growth momentum in the fourth quarter of 2012. Minutes of the Fed’s latest meeting and the ADP employment report are likely to remain the key focus today.

Pound Sterling – UK Markets

Sterling staged a retreat against the US Dollar and gave up some of its gains in the latter half of yesterday’s trading session, as the initial euphoria surrounding the “fiscal cliff” deal faded amid the prevalent threat that similar brinkmanship could be seen between policy makers when the US hits the debt ceiling in February 2013. However, risk aversion among traders has propelled Sterling broadly higher against the Euro in today’s trading session. The recent PMI reading showed that British manufacturing grew unexpectedly in December at the fastest pace in fifteen months, thereby stoking optimism that the UK economy is well poised to report strong growth for 2013. However, today’s downbeat construction PMI from the UK has shifted focus to tomorrow’s domestic services activity data. Although recent indicators have shown a modest pick up in mortgage lending, its influence on house prices remained fairly minimal, as data from Nationwide showed a drop in UK house prices for December. In today’s trading session, some important releases related to the US labour market is likely to provide further direction to market sentiment.

US Dollar – US Markets

After the initial fall following the fiscal cliff deal, the greenback has steadily staged a rebound against the Euro and Sterling going in today’s session, as traders fear the possibility that markets might remain hostage to events unfolding in the political arena. There is a prevalent belief that the growing resentment among US policy makers could create hassles when the US is seen breaching the debt ceiling sometime next month. Although the bipartisan deal has aided the US economy to escape a potential recession, the nation’s fiscal situation remains a cause of concern. The IMF warned that US lawmakers have made no major progress in addressing bigger problems related to fiscal deficit and growing debt. Moreover, credit rating agencies echoed similar concerns but offered no hints on revising their credit rating outlook on the nation. Meanwhile, today’s ADP employment report and jobless claims data is expected to offer some insight ahead of the much awaited non-farm payrolls figures due for release in tomorrow’s session. Additionally, minutes of the Fed’s latest meeting scheduled for release today will shed some light on the factors that played on policy makers’ minds to link interest rate guidance to thresholds for unemployment and inflation.

Euro – European Markets

The euphoria following the fiscal cliff deal soon died down, as traders acknowledged that the deal does not bring the US fiscal woes to an end, with markets likely to be influenced by developments from the political arena in the US. Against this backdrop, the Euro declined against its major peers in yesterday’s session and slipped below the 1.32 mark against the US Dollar. The Euro has continued to trade close to yesterday’s lows against the majors this morning. However, the common currency has limited its further downside after data released earlier today indicated that number of unemployed persons in Germany climbed at a slower than expected pace for December. Meanwhile, an unexpected uptick in German inflation yesterday appeared to have calmed voices calling for an immediate interest rate cut by the ECB. With no major European macro releases scheduled today, the spotlight is expected to remain on economic data from the US for further direction to currency markets.

Other Currencies – Highlights

The Swiss Franc has advanced marginally against both the Euro and the US Dollar in today’s trading session. The domestic economic data released earlier today was a mixed bag, with the Swiss manufacturing PMI posting an unexpected rise while the KOF leading economic indicator declined more than expected for December. With no major domestic data due for the week, the Swiss Franc is likely to rely on external cues for further direction. Traders are expected to keep a close watch on today’s economic releases from the US and highly influential non-farm payrolls figures scheduled for release tomorrow for further insights into risk appetite among market participants.