With Christmas just around the corner, markets opened to a fresh wave of risk aversion after US fiscal cliff negotiations broke down. Nevertheless, the US Congress is expected to reconvene next week and the President remains hopeful that a deal can still be done. With the majority of UK businesses set to close for the Christmas break, sterling will be given one final test following the release of the final Q3 GDP figure. Any downwards revision from the current figure of one per cent could leave the pound under pressure. Data is also due from Europe in the form of German consumer sentiment index and French business climate figures. After a strong couple of weeks, European investors are hoping the single currency will enter the holiday season on the front foot. Elsewhere, the yen remains on the end of selling pressures following the announcement of the Bank of Japan’s new monetary easing programme earlier in the week.
Sterling
Disappointing retail sales figures failed to attract investors back into the pound after it was revealed that sales growth came in flat last month. This will leave a great deal of attention on the final Q3 GDP figure which currently stands at one per cent. Any result below this could pile the pressure on the pound before the Christmas holidays. Sterling’s newly found safe haven status will also be put to the sword after US fiscal cliff negotiations broke down on Thursday night. Public sector net borrowing figures are also due for release.
US dollar
As we enter the holiday break markets are still anxious about the US government’s lack of fiscal direction. With talks on the fiscal cliff now suspended until next Thursday, the US dollar may pick up some safe haven holiday flows. Any possible movement on the US dollar is likely to be on the back of safe haven flows. A lack of liquidity over the holiday period has traditionally seen volatility and traders are likely to park any long positions before the break.
Euro
The euro lost ground following the decision by Standard and Poor’s to downgrade Cyprus. This news, accompanied by easing risk appetite, lifted the euro away from eight-month highs against the US dollar. Asian markets were trading lower in the overnight session, which gives us a good indication what sort of mood European traders may be in when they reach their desks. With a lack of eurozone data, and thin trading volumes ahead of the festive period, trading in the single currency is likely to be dictated by events across the pond.