Hung parliament in Italy keeps the roller coaster going | Smart Daily Currency Note

Sterling

Yesterday was not for the faint hearted as the currency markets twisted one way and then the other as the news flow gathered pace. Sterling was aggressively sold off in early trading yesterday, reaching a sixteen month low against the euro and a 2.5 year low against the US dollar following  Moody’s - one of big three credit rating agencies - downgrading the UK’s sovereign rating by one grade to Aa1 from Aaa. The bond markets appeared to pay little attention to the news, with yields on UK government debt little affected by the news. Weaker than expected mortgage approvals data did little to help sterling early on. However, sterling has staged a recovery, albeit I suspect short term one, in the late afternoon reaching as news of a hung parliament in Italy undermined the euro. Chancellor George Osborne spoke yesterday and confirmed that the government would not deviate from its current path in spite of the recent downgrade. Early this morning the Governor of the Bank of England will be speaking and later on today we also have the realised sales data from the Confederation of British Industry (CBI)and a report from the Governor of the BoE and its Monetary Policy Committee (MPC) members on inflation and the current economic outlook. Call now for the latest updates on sterling.

Euro

The euro had a mixed day yesterday reaching a 16 month high against sterling in the morning, as well as making significant gains versus the US dollar before a sharp sell-off in the afternoon. The euro performed well in early trading as there was a confidence in the market that the centre-left leader Bersani (the frontrunner) would win an outright victory. This confidence disappeared as figures began to show that Silvio Berlusconi may have built a up enough support to deny Bersani outright victory - which triggered speculation of another election and the euro was sold off across the board.  European policy makers gave an improved outlook for the region with the European Union Economic and Monetary Affairs Commissioner talking down the risks around the region and saying that "reforms are starting to pay off, deficits are declining and Europe will gradually return to growth". However, the CESifo (an economic research group in Europe) warned that further austerity "will dampen economic activity in almost all member States" as well as stating that "domestic demand looks set to shrink further in 2013" due to high unemployment. This unemployment along with a number of poor developments may encourage the European Central Bank (ECB) to lower interest rates, which will force the Governing council to carry out its easing cycle across 2013 with this economic downturn causing price instability. We have a quiet day today in terms of data coming out of Europe; but, expect further aggressive movements in the markets once the final result from the Italian election is announced. We also have a speech a from the ECB President today, as well as an Italian bond auction. Call now for the latest news and live rates.

US dollar

The US dollar had relatively strong day all round yesterday strengthening against most of its major currency partners as risk aversion dominated the markets due to fears over the Italian parliamentary election.  The Chairman of the Federal Reserve, Ben Bernanke is due to feedback on the current monetary policy today and analysts expect the Chairman to outline his support for the current stimulus program. There will also be new residential sales data and consumer confidence figures. With a host of data released today, we could see a significant effect on the US currency, so call in now or a market update and a live quote.

Worldwide

Elsewhere, the Japanese yen was in the headlines once again due to rumours that the prime minister is close to nominating Mr Karudo as the next governor of the Bank of Japan. The yen dropped to a 3 year low against the US dollar following this announcement as Mr Karodu is a man who has clearly stated his willingness to increase monetary stimulus if necessary. Worse than expected Chinese manufacturing PMI released early on Monday caused commodity backed currencies to struggle. The Indian rupee has risen 1.5% year-to-date, starting the year on a strong footing following steps taken by the Indian government to manage its ‘twin’ deficits. The next catalyst for the rupee should be the Indian budget announcement later this week. In all likelihood, it is going to be the most austere budget in recent years as the focus of the government remains on managing its fiscal as well as current account deficit and reviving investment flows into the country. Call in now for a market update and a live quote.