Euro Banking set for Changes

Sterling fell back versus the dollar early yesterday, tracking the euro lower after the rating’s agency Fitch downgraded Ireland’s sovereign rating, we have seen the pound recover slightly over the night trading session and start well today. Trading for GBP – EUR meanwhile has been confined to tight trading ranges over the past 24 hours reaching €1.1963 high and 1.1901 low overnight.

We have seen a relatively muted response to the news that the Bank of England chose to leave interest rates on hold for a record 20 months in a row. This was much in line with expectations and we wait the minutes of the meeting later this month to see whether the sentiment from policy makers focuses on further cash stimulus.

The UK’s global goods trade deficit widened unexpectedly in October as imports soared to a record high, driven by purchases of chemicals from several European countries, data from the Office for National Statistics showed yesterday. The goods trade deficit grew to £8.5 billion from a revised £8.4b in September.

UK goods exports rose 4.1% from September to £23.1 billion, the highest level since May 2006, driven by an increase in overseas oil sales.

The Euro fell sharply versus the dollar following the downgrade from Fitch. This coupled with comments from the Irish Labour Party which claimed that it would vote against the legislation for the IMF/EU rescue package that goes before the Dail next Wednesday weighed on sentiment heavily.

We have seen a slight rebound overnight though, with the euro pushing towards $1.33, however fears about further problems in relation to the euro zone’s fiscal crisis which encompasses Greece, Spain, Portugal and Belgium are limiting any positive moves. Irish fundamentals have suggested some slightly better news with unemployment seemingly falling from its peak of 13.7% in July to 13.2% in November, small but good news for the Irish.

News that shouldn’t surprise is that European regulators are set to reveal new restrictions on the bonuses that banks can pay their staff. The limits are expected to be finalised today by the Committee of European Banking Supervisors (CEBS), although an announcement may not come until Monday.

The rules are likely to be much tougher than those agreed by the G20 countries, raising fears that bankers may emigrate to more lightly regulated countries. It is thought the bonus limits will apply to European bank staff globally. However, non-European banks will probably only face restrictions on what they pay staff working for subsidiaries based in the European Economic Area.

European shares rose for the fifth session on Friday, with BMW gaining following a positive broker note, while banks slipped after Standard Chartered was hit by a Bank of America Merrill Lynch downgrade.

However, gains were limited as investors remained cautious ahead of Saturday's Chinese November CPI figures, with analysts concerned a high reading could prompt the central bank to raise interest rates.

The euro was steady against the dollar on Friday, staying soft on concerns over the sovereign debt crisis in the euro zone while talk of the possibility of more monetary tightening in China dampened appetite for risk. Strong Chinese export and import figures helped commodity-linked currencies like the Australian dollar a little, but gains were limited as the better data also increased the risk of an interest rate hike.
"The euro has held up surprisingly well given the poor news coming out of Europe. Without further momentum in bad news we are likely to see more consolidation," said Carl Hammer, currency strategist at SEB in Stockholm.

He added that a rate hike in China would be negative for risk appetite, but probably only in the short term as a strong Chinese economy is still a positive for global growth.
The dollar .DXY index, which tracks the greenback's performance against a basket of major currencies, was little changed at 79.99, struggling to break through the 80.00-81.50 barrier that capped its November rally. The dollar's 14-day, 21-day and 90-day moving averages as well as the ichimoku tenkan line are all clustered around 83.40-60, making the area a strong support level.

But the greenback's repeated failure since late last month to take out resistance around 84.40 is encouraging many traders to take profits near that level, leading to expectations that its 83.50-84.50 range will persist for now.

Japanese stocks fell on Friday after a rise to a seven-month high earlier in the day prompted profit taking, although they outperformed the rest of Asia this week, while U.S. Treasuries steadied on the view yields had risen too high, too quickly.

European shares rose for the fifth straight session, with the FTSEurofirst 300 up 0.2 percent and London's FTSE 100 0.3 percent firmer. U.S. stock index futures SPc1 were up 0.2 percent.
With 2010 almost over, investors were reluctant to throw much money into any single trade now that a big selloff in Treasuries had died down and opted instead to take profits on small positions in thin trading volumes.

Whether China would raise interest rates this year, perhaps even this weekend, was on investor radar screens as they assess risk taking, especially after a state-run newspaper said inflation may have hit 5.1 percent in November.