US Dollar Falls As Fiscal Uncertainty Looms

Tom Tong20/Dec/2012Currency Updates

GBP

After the BOE minutes were released yesterday morning the pound rose against the dollar setting a new 3 month high as the report showed that policy makers voted in strong favour – 8 -1 to keep their £375 bn asset- purchasing program unchanged despite lower than forecasted CBI Data.

However David Miles one of the monetary policy committee (MPC) members, voted for the second consecutive month to raise the central bank’s quantitative easing by £25bn. Many interpret the 8-1 vote as being as hawkish as one could expect. Stronger first quarter economic performance is already beginning to be priced in resulting in demand for the pound and sterling assets. The committee did however vote unanimously to leave the interest rates unchanged at 0.5%. This means the rate has been kept at this record low since March 2009.

This morning we will be watching closely as the National Statistics releases the Retail Sales (YoY) (Nov) widely followed as in indicator of consumer spending. The consensus being it will be up by nearly 1 % to 1.5% and of course the higher the reading the more bullish for the GBP

EUR

The Euro rose to an 8 month high yesterday against the dollar and a 16 month high against the Yen. This was due in a large part to the heart of the Euro zone Germany releasing stronger than expected business confidence figures. The German IFO stated that its business sentiment survey rose to 102.2 in December from 101.4 the month before. This was a bigger move than economists had expected, however the Euro was also supported early on by the news that there was a rise in Greek bond prices due to an overnight upgrade by the rating agency Standard and Poor, sitting them more comfortably with a B rating – indicating a stable outlook, up from a selective default rating they’ve held recently.

The single currency began to come of its high however later in the day as the worries about the US and the fiscal cliff surfaced again. This along with thinning holiday volumes meant there was little follow through on trades as the day wore on resulting in a fall in risk appetite.

In other news Mario Monti the un elected Italian prime minister as signaled his intention to plunge into politics to defend his reform agenda in next year’s election. Leading an alliance of centralised pro-European parties. Whilst the chances of winning may be slim it could give him a stronger negotiating point in a future government. This could lead to a more pro-European Italy only strengthen the entire region.

As far as today in the Euro zone the key economic data coming out is pretty thin apart from The European Systemic Risk board meeting at 12.00.

USD

The dollar continued to lose ground against its major counter parties yesterday. This was due to the White House telling business leaders that the budget talks had again regressed. President Barack Obama accused Republicans of “wasting time” and “posturing” in proposals to avert the so-called fiscal cliff. This will mean the automatic trigger of more than $ 600 Bn in automatic tax increases and spending cuts that will take effect in January unless congress acts. Mr Boehner the republican speaker for the House of Representatives counted theses jabs by saying “the president needs to get serious soon providing and working with us on a balanced approach”. This bickering does not help market sentiment leading to fear if the fiscal cliff passes the US would enter straight into a recession at the beginning of the year.

Key data out today in the US is The Gross Domestic Purchases Price index (Q3) which gauges the changes of prices of goods and services. Generally speaking a high figure as seen as bullish for the dollar. Gross domestic Product annualized (Q3) also is released at the same time again once again a high figure as seen as bullish for the dollar.

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Written by Tom Tong

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