Dark Clouds Still Remain

Despite the global economy showing some promising signs of staging a recovery, Europe continues to falter, as continuing debt woes continued to damage the region’s economic prospects. Unemployment in the Eurozone once again reached record highs, while the region’s retail sales and German factory orders maintained a declining trend, further highlighting that Eurozone’s economy remains in the abyss for the fourth quarter. In the UK, the trade deficit narrowed marginally for November. However, plenty of near term hurdles remain for the British economy, with continued speculation that the UK will lose its top notch credit rating. Meanwhile, tomorrow’s ECB and BoE monetary policy meetings will remain important near term triggers.

Pound Sterling – UK Markets

The latest trade figures had limited impact on Sterling, as data showed that the trade deficit narrowed from elevated levels but still remained above estimates. However, the Pound continued to languish closer to yesterday’s lows against the US Dollar, as the narrowing trade deficit failed to shrug off the prevailing weakness in Sterling following a recent raft of disappointing economic releases. UK business leaders have urged the nation’s policy makers to reject proposals for a slimmed down membership of the EU, as such a move could potentially jeopardise investment in the UK and could stand to hurt the nation’s exports. Against this backdrop, Prime Minister David Cameron’s speech scheduled later this month is likely to offer some clarity into the UK’s future ties with the EU. Data from the BRC revealed that shop price inflation in the UK remained steady, as food inflation showed signs of cooling down from stubbornly high levels. Meanwhile, the BoE policy meeting tomorrow remains a key event on traders’ radar.

US Dollar – US Markets

The US Dollar strengthened against the Euro in yesterday’s session, as a weak set of economic releases from the European union prompted traders to seek shelter in the greenback. However, the US Dollar has lost ground against high yield currencies in today’s session on growing optimism that the fourth quarter corporate earnings season will show visible signs of a global economic recovery. Traders will also be closely monitoring trade data from China scheduled for release tomorrow, given the recent improvement seen in surveys on the nation’s manufacturing sector. Meanwhile, consumer credit in the US climbed for the fourth straight month for November, broadly supported by the improving prospects of the nation’s labour market. Meanwhile, recent surveys showed an improvement in small business confidence and economic optimism in the US, strengthening the belief that 2013 would remain positive for the economy. With no major data scheduled for today, economic data from China and monetary policy meetings in Europe will hold the key for setting the trend in currency markets.

Euro – European Markets

The latest set of economic indicators from Germany exacerbated fears that the problems economies is engulfing the core Eurozone nations. Factory orders continued to decline, validating earlier numbers which showed a sharp fall in exports for November. Against this backdrop, it remains to be seen whether the German economy escaped a contraction in the fourth quarter. Today’s German industrial production data is likely to shed more light on this. Meanwhile, the Euro slipped against the US Dollar in yesterday’s session, as traders shunned the single currency. Unemployment in the Eurozone climbed to a record high for November. In a noteworthy development, Ireland successfully completed an auction of long term bonds, sending strong signals that it is regaining access to markets just over two years after its bailout. Apart from industrial production figures from Germany, traders keenly await the ECB Chief, Mario Draghi’s press conference in tomorrow’s session, given the prevailing prospects of further rate cuts.

Other Currencies – Highlights

The Kiwi Dollar advanced against the US Dollar and the Euro in today’s session, as data due for release later today is expected to show that the nation’s trade deficit narrowed for November, supported by improving exports on account of the global economic recovery gaining momentum. Among other economic releases, data today offered a mixed picture, as New Zealand building approvals for detached houses surged to the highest level since May 2010, while permits for apartment consents slumped to a nineteen month low. Apart from tomorrow’s all important domestic data, traders will also stay watchful about external cues, as a key set of economic releases from China and central bank meetings in the Eurozone are expected to have an impact on the currency markets.