2012: The year of the USD among market uncertainty
29/Dec/2011 • Currency Updates•
Sterling was steady on Wednesday as thin year-end trading trapped it in tight ranges, staying not far from an 11-month high against the euro as the single currency remained under pressure before the Italian debt auctions. Analysts suggest that GBP/USD may continue to trend sideways ahead of the New Year as the fundamental outlook for the U.K. remains clouded with high uncertainty. The sterling is feared to trade heavily throughout the first-half of 2012 as the slowing recovery in the UK economy is dampening the appeal of the sterling. Furthermore, the increased willingness of the Bank of England to expand its asset purchase program beyond the £275bn target expectations for additional monetary support instills a bearish outlook for sterling.
The overnight Italian bond auctions success at raising capital at half the average yield from the euro-era record raised the mood of the markets but we are still finishing this year in a situation where Europe is far from resolved. The success could be a reaction of desperate European banks stashing funds in the ECB, opting for low interst over short term market loans, amid fears they could be hit by a Eurozone breakup. Fearing a bank collapse domino effect, this is a sign of market uncertainty and can have a chilling effect on investors. Indeed, the Asian stock market has slumped, EUR-JPY hit a 10yr low in New York trading and ZAR has gained against the EUR for the third day in a row to its strongest level in three months.
Sterling fell against the US dollar today as ongoing concerns about the eurozone and a downbeat assessment of the UK economy from the Chartered Institute of Personnel and Development (CIPD), encouraged traders to flock back to the perceived safety of the US dollar. The news that the European Central Bank balance sheet is soaring, with new bank lending jumping, has many searching for a little stability. And that means that the US dollar has the upper hand against high beta currencies right now. Indeed, a sign of this is the Japan-India $15bn currency swap which will tide over the shortage of USD in Mumbai amid Eurozone concerns. The market players are now looking to square off positions ahead of the final trading day of 2011 tomorrow.