Central bank rhetoric provided fresh incentive for EUR/USD and the risk trade this morning. EUR/USD has pushed closer to the 1.500 level coming up against solid resistance in the 1.4990 level. The Fed's Bullard suggested the Fed should keep its options open with respect to easing which weighed on the USD. By contrast, the ECB has set in motion the initial phase of its exit policy. A decent set of European PMI data this morning underscored the view that the Eurozone recovery remains in place, though the data failed to have a significant market impact. Gold prices printed another fresh high on the back of USD weakness with Bullard's comments promoting the discussion of medium-term inflation potential.
The Fed's Bullard has suggested that the Fed should maintain its plan to buy mortgage backed securities beyond March. Earlier this month the Fed indicated that this plan will have run its course by March. By contrast, the ECB has tightened lending criteria marginally by amending the rating requirements for assets backed securities eligible for use in credit operations. This followed warnings from ECB President Trichet on Friday that a 'prolonged' supply of cheap cash runs the risk of 'dependence and even addiction'. Recently, the ECB's Weber suggested that the ECB may not extend its 12 mth allotments beyond the end of this year. These operations have been the mainstay of the ECB's extraordinary policy reactions to the financial crisis with QE playing a very small part. Eurozone composite PMI data for Nov at 53.7 shows a continued expansion in the region.
There was no UK data this morning, though Tory leader Cameron looks to be back-tracking on his promises to tackle deficit reduction in the face of a declining advantage in opinion polls.
While this could weigh on the gilts market next year, sterling has recovered some ground vs the EUR and the JPY aided by comments from the IMF's Strauss-Kahn that forecasts show a strong 2010 UK recovery. Cable has also been dragged higher on the back of the weaker USD, recovering back towards USD1.6630 before sellers emerged.
The NZD has been one of the strongest performing currencies this morning aided by the improvement in risk appetite. The AUD has also pushed higher printing an intraday high of USD0.9248. USD/CAD has pushed down towards CAD1.0560.
