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Daily currency report

Overview

Europe will release trade data but the figures are not likely to impact the euro, or dislodge pressure on both the US dollar and Japanese yen. However, investors will probably pay more attention than usual to US manufacturing survey for signs of how the fiscal cliff problem is impacting business sentiment. The Federal Reserve will also be speaking and its thoughts could offer some guidance as to how much investors should be concerned by the country’s fiscal dilemma. Inflation data from the UK may allow sterling to stand up against its more risky rivals.

Sterling

Sterling hovered close to its October lows against the euro after eurozone leaders stepped up progress on giving the European Central Bank greater powers to help deal with the debt crisis, UK consumer price inflation data could offer the pound a little padding by limiting scope for further Bank of England monetary easing. Year-on-year inflation, which is the foundation of the BoE’s monetary policy, is forecast to come down by just 0.1 per cent to 2.6 per cent in November, staying well above the bank’s two per cent inflation goal.

US dollar

The US dollar has crumbled to six-month lows versus the euro after the latest inflation data from the US economy suggested the Federal Reserve will maintain its dollar-negative monetary policy strategy for some time to come. The dollar was already suffering after the Federal Reserve launched a bigger and more direct stimulus programme that will add $45 billion of monthly Treasury purchases to its existing plan of buying $40 billion of mortgage linked assets per month. The Federal Reserve also went a step further by tying interest rates to specific economic fundamentals for the very first time, promising to keep interest rates near zero until unemployment fell to 6.5 per cent as long as medium-term inflation stayed below 2.5 per cent.

Euro

The euro made a rapid climb to six-month highs against the US dollar and has made further progress as traders continue to sell the US currency in response to the Federal Reserve’s quantitative easing expansion. US inflation data also underlined the Federal Reserve ultra-accommodative outlook on monetary policy, while the euro found additional support after eurozone leaders started building a new framework to provide European countries with a more stable banking environment.

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