The Euro was mostly unchanged against the dollar overnight as European equity markets fluctuated and U.S. stock futures pointed towards a slightly lower open.  Meanwhile, the German ZEW investor confidence survey weakened more-than-expected in November, with the headline reading slipping to 51.1 from 56.0.  The ZEW survey for the Euro-Zone fell to 51.8 from 56.9 amid forecasts for a rise to 58.0, and the data suggests investors are scaling back their outlook for future growth as policy makers continue to see a risk for a protracted recovery.  The final CPI reading for Europe’s largest economy showed price increased 0.1% in October, with the annual rate of inflation holding flat during the month.  Also, wholesale prices in the region fell 0.4% during the same period after slipping 0.2% in September, with prices tumbling 7.0% from the previous year.  The data reinforces a dovish outlook for future policy as the European Central Bank expects inflation to remain subdued going into 2010.

The Japanese yen rose against its major counterparts, while trading mostly unchanged against the dollar.  The yen was able to gain strength after Fitch Ratings fueled concern that government finances remain fragile, boosting demand for the “safe-haven” currency.  Fitch Ratings also said that Japan is unlikely to experience a “rapid economic recovery” as a stronger yen, falling prices and unemployment weigh on growth.  Expect the yen to continue its correlation to risk; gaining is equity markets slip from their recent highs. 

The pound fell from a three-month high against the dollar after Fitch Ratings said the U.K.’s sovereign credit rating is the most at risk among top-rated nations.  David Riley, Fitch’s head of global sovereign ratings said Britain needs “the largest budget adjustment” among countries it rates AAA.   Meanwhile, the economic docket reinforced an improved outlook for the region as the BRC retail sales monitor increased at an annual pace of 5.9% in October after rising 4.9% in the previous month.  Also, the RICS house price balance index jumped 34% after rising 21% in September to top expectations for a 28% rise.  As growth prospects improve in the U.K. pound may continue to trend higher over the near-term and continue to retrace the sell-off from August as policy makers see the economy emerging from the worst recession since the post-war period.

The Euro gained overnight and is poised to test its yearly high against the greenback as investors raise their appetite for risk.  At the same time, investor confidence in Europe increased for the fourth consecutive month in November, with the Sentix index rising to -7.0 from -12.6 in the previous month.  Also, industrial outputs in Europe’s largest economy increased 2.7% during the same period to top forecasts for a 1.0% rise, a sign businesses may continue to ramp up their rate of production over the coming months as policy makers anticipate the euro-region to return to growth going into the following year.  Expect the Euro to continue its strong correlation to risk sentiment, gaining as global equities continue to rise.

The Japanese yen weakened against its major rivals, while trading largely unchanged against the dollar as investors shunned the safe haven currency in favor of higher yielding assets.  Both European and Asian stocks advanced overnight and the yen could continue to remain under pressure as U.S. equities are also pointed to a higher open.  Historic low interest rates in Japan and the U.S. make the dollar and yen favored targets for investors seeking to fund carry trades and could continue to put pressure on the pair. 

The pound continued its advance, rising to its highest level against the dollar in three months as equities advanced amid increased demand for higher-yielding assets.  Last week, the Bank of England said there are signs the economic recovery is taking hold and expanded its asset purchase program to 200 billion pounds, 25 billion less than forecast.  As the outlook for the U.K. economy improves, expect the pound to remain firm against the greenback.

The Euro was largely unchanged against the dollar following the European Central Bank’s decision to leave interest rates at a record low of one percent.  Later this morning, ECB President Jean-Claude Trichet will speak at a news conference and comments from the central bank head is likely to move the currency market as investors weigh the outlook for future policy. Meanwhile, retail spending in the Euro-Zone unexpectedly slipped 0.7% in September to mark the 16th consecutive monthly decline, with the annualized rate tumbling 3.6% from the previous year amid expectations for a 2.4% drop.  The data suggests that households may continue to curb their rate of consumption over the coming months as they face a weakening labor market paired with tightening credit conditions.

The Japanese yen fell across the board, while gaining slightly against the dollar as investors increased their appetite for riskier assets.  Global stocks advanced as both the European Central Bank and Bank of England held improved outlooks for their economies.  With U.S. equities pointed to a higher open paired with strong economic data released in the U.S., the safe haven currency will likely continue to be under pressure.

The pound rose against the dollar overnight after the Bank of England’s interest rate decision.  As expected, the BoE held interest rates unchanged, but increased its asset purchase program by less than economist forecast.  The BoE increased its quantitative easing program from 175 billion to 200 billion pounds, amid expectations of a 225 billion addition.  The central bank also held an improved outlook for the future growth and said that the rebound in economic activity will soon become evident, and went onto say that bank funding conditions have picked up following the unprecedented steps taken by the government.  Meanwhile, the economic docket showed industrial outputs in the U.K. increased 1.6% in September amid expectations for a 1.2% rise. Manufacturing also jumped 1.7% during the same period to top forecasts for a 1.0% expansion.  The data reinforces the improved outlook held by the BoE, buoying the sterling. 

The Euro gained against the dollar in overnight trading as risk assumption re-entered the market.  The Euro could continue to gain during the U.S. trading session as U.S. stock futures are pointed towards a higher open.  Tomorrow, the European Central Bank is anticipated to hold the key rate at 1.00% and is likely to raise its outlook for future growth as the economy emerges from the recession.  However, many investors speculate the Governing Council will hold a neutral policy throughout the remainder of the year as the central bank sees a risk for a protracted recovery.  Today the final services PMI reading for Germany weakened to 50.7 from an initial forecast of 50.9, with the gauge for the Euro-Zone increasing to 52.6 from 52.3.  Also, producer prices fell 0.4% in September after rising 0.5% in the previous month.  The lack of inflationary pressures in the Euro-zone will likely reinforce investor’s speculation that the ECB will continue to hold a neutral policy stance going into 2010. 

The Japanese yen fell across the board as increased risk appetite pushed the currency lower.  Higher Asian and European stocks have shifted flows from the safe haven currency into higher yielding assets, including the Euro and pound.   The yen could experience more weakness during our trading session as U.S. equity futures are also pointed higher. 

The British pound continued to gain against the U.S. dollar, retracing its previous months losses versus the greenback.  On Thursday, the Bank of England is widely expected to hold interest rates at 0.25% and will likely maintain its asset purchase program to encourage recovery.  However, any indication that the central bank will add to its already extensive quantitative easing program will weigh on the pound.  Meanwhile, Nationwide consumer confidence survey held at 72 for the second consecutive month in October, which is the highest since April 2008.  Also, service-based activity expanded for the sixth month in October, with the PMI reading jumping to 56.9 from 55.3 in the previous month to mark the highest level since September 2007.  The data reinforces a positive long-term outlook for the U.K., but expect the pound to continue to trade with the prevailing risk sentiment, gaining as stock push higher. 

The Euro lost significant ground against the U.S. dollar as European stocks fell to a two month low as UBS AG reported a wider-than-estimated loss.  UBS sank the most since May as Switzerland’s largest bank posted its fourth consecutive quarterly loss, driving markets lower.  However, the Euro will likely trade in choppy ranges over the next few days as market participants wait for the European Central Bank’s interest rate decision on Thursday.  Meanwhile, the European Union raised its growth forecast for the economy and projects GDP in the euro-region to expand at an annual pace of 0.7% in 2010 and 1.5% in 2011, but continues to see a 4.0% contraction this year.  However, the EU continued to see a risk for a protracted recovery as the jobless rate is expected to hit 10.75% in 2011.  The Euro will continue to trade with risk, therefore if equities continue to trade on their back foot, expect the common currency to remain under pressure. 

The Japanese yen gained across the board, while trading flat against the dollar, as the pair benefited from safe haven flows.  The yen advanced as stocks fell on evidence banks are struggling to shake of the effects of the global recession, sapping demand for higher yielding currencies.  With U.S. equities pointed to a higher open, expect the yen to remain firm against its major counterparts.

The pound fell overnight as investors flocked to the U.S. dollar and Japanese yen as a hedge against risk.  The U.K. government increased its stake in Royal Bank of Scotland Group Plc and Lloyds Banking Group, causing stocks to falter.  The economic docket for the U.K. showed construction spending fell at a faster pace in October and the PMI reading slipping to 46.2 from 46.7 in the previous month amid expectations for a rise to 47.2.  At the same time, Chancellor of the Exchequer, Alistair Darling, said economic conditions have improved and expects the growth rate to expand in the new year, but went onto say that it may take years for the government to recoup taxpayers funds used to bailout Lloyds Banking Group and Royal Bank of Scotland as financial conditions remain far from favorable.  Therefore expect the pound to remain under pressure ahead of Bank of England’s interest rate decision on Thursday, as the central bank is likely to hold its dovish done.