European Litmus Test Ahead

The unexpected 8-1 votes in favour of QE to remain unchanged, with Adam Posen backing out from his earlier stance for further easing, resulted in Sterling breaking crucial levels against both the Euro and the US Dollar yesterday. This has taken calls for further asset purchases in the BoE’s next monetary policy meeting off the table, as inflation still continues to bother policymakers. The focus in today’s trading session returns to the Eurozone, where Spain and France are set to auction long tenure bonds amid resurgent contagion fears. The US jobless claims and Philly Fed manufacturing index are also expected to generate market interest today.

Pound Sterling – UK Markets

Yesterday, Sterling succeeded in breaking the psychologically important levels of 1.22 and 1.60 against the Euro and the US Dollar respectively, after minutes of the last BoE’s monetary policy meeting revealed that the usually dovish policymaker, Adam Posen, reversed his stance of adding further stimulus. This has left David Miles as the only contender supporting the need for additional asset purchases. It will take a marked deterioration in the domestic economic outlook to tilt the scale in his favour at the next policy meeting. QE hopes faded further after BoE’s Deputy Governor, Paul Tucker, opined that high inflation is likely to dampen the central bank’s appetite for implementing more easing measures. Additionally, an unexpected decline in the British unemployment rate and a slower pace of addition in jobless claims signaled stabilisation in the labour market. With an apparently quieter session ahead in terms of domestic economic releases, Sterling has maintained the upbeat tempo against the majors today. The Pound is likely to respond to the outcome of European bond auctions and a set of important economic indicators across the Atlantic.

US Dollar – US Markets

The US Dollar had slipped to this year’s lowest level against Sterling yesterday, following minutes of the BoE’s latest monetary policy meeting. In today’s trading session, the US Dollar has continued its southward journey against the Pound and is trading marginally lower against the Euro, amid market speculation that China may resort to further easing via open market operations and rate cuts to support the economy. Today, market participants are expected to closely track jobless claims data for further insights over sustainability of the recent economic recovery, especially after worrying comments by the US Fed Chairman and last week’s dismal jobless claims report. Following deterioration in the New York manufacturing activity, Philadelphia Fed manufacturing index too is expected to register a drop for April. Among other releases, existing home sales for March is expected to show an improvement. In addition to macro indicators, the US Dollar is likely to track prevalent market sentiment following the scheduled Spanish and French bond auctions later today.

Euro – European Markets

The Euro moved lower against the Pound and is holding almost steady against the US Dollar this morning, as concerns over Spanish financial health escalated in the run up to today’s long term bond auction, which is seen as a test of Spain's capacity to grapple with financial and budgetary pressures. Worrying news flows from Spain continued yesterday, after the Bank of Spain indicated that bad loans held by Spanish banks have hit an 18-year high. After Greece and Spain, Italy seems to have joined the bandwagon after the Italian government warned that it will miss its pledge to balance its budget by 2013 and further slashed its growth forecast for 2012. There was no respite on the macro front as well, after data indicated that Eurozone’s current account balance swung to deficit and the region’s construction output fell sharply for February. In today’s trading session Spanish and French bond auctions, Eurozone consumer confidence and a G20 meeting commencing today aimed at expanding IMF funding, hog the spotlight.

Other Currencies – Highlights

The Kiwi Dollar has climbed against the US Dollar amid market speculation that China may resort to policy easing to shore up the economy. Additionally, yesterday’s data indicating a rise in New Zealand’s consumer confidence index for April to the highest level in three months also aided the uptrend in the Kiwi Dollar. Meanwhile, data released this morning showed that consumer price inflation in New Zealand eased for the first quarter. This has reinforced market expectations that the Reserve Bank of New Zealand could keep interest rates at a record low for long. In today’s trading session, we expect Spanish and French bond auctions and news flows from the G-20 meeting to dictate the movement in the Kiwi Dollar.