GDP numbers just released indicate that the UK economy has entered into a technical recession, contracting 0.2% in the first quarter of 2012. The Pound fell against the majors on the back of this release and market expectation appears to indicate this release will weigh heavily on Sterling throughout today’s trading session.
With little solid data released in Europe today the attention is likely to shift to the US as the Federal Reserve (Fed), in its monetary policy decision, is likely to reiterate its intent to keep the benchmark interest rate near zero through 2014. Markets are also keeping an eye on the Fed's economic assessment and Ben Bernanke’s press conference for hints on future policy including the probability of a QE3.
Pound Sterling – UK Markets
The Pound has declined against the majors this morning after data just released revealed that the British economy contracted in the first quarter of 2012. UK GDP declined 0.2% in the first quarter, affirming BoE policymaker, David Miles’s stance of a contraction in the British economy.
Yesterday Sterling slipped against the Euro following a positive response to the Dutch bond auction, despite the recent turmoil in the nation’s political environment. Additionally, encouraging Italian and Spanish bond auctions, coupled with more than expected improvement in French consumer confidence, weighed on the Pound. Meanwhile, the UK public sector borrowing data offered a mixed picture, as the government borrowed £2 billion more than expected in March but managed to meet its full year borrowing target.
Among other economic releases today, CBI’s business optimism barometer is expected to reveal an improvement for April.
US Dollar – US Markets
The US Dollar retreated against the Euro yesterday following a positive response to bond auctions in Europe and an improvement in French consumer confidence for April.
Additionally, worries over the US housing sector strengthened market speculation that the Fed may introduce additional easing measures in the near future. Data indicated that S&P/Case-Shiller home price index fell to the lowest level since October 2002, while new home sales declined sharply for March. Further highlighting the deteriorating landscape, consumer confidence declined for April.
In today’s trading session, the US Dollar has retreated against the Euro while it has edged higher against the Pound. The Federal Open Market Committee’s (FOMC) monetary policy meeting and the US Fed Chairman, Ben Bernanke’s press conference later today are expected to offer more cues over the stance that the central bank may take during the course of the year. Markets expect the Fed to provide hints on future policy options after Operation Twist expires in June. Additionally, markets are keeping an eye on the Fed’s forecast for key macro indicators and durable goods orders data due later today.
Euro – European Markets
Yesterday, the Euro held on to its initial gains against the US Dollar, tracking robust demand at the Spanish and Italian bond auctions and an improvement in French consumer confidence. The Dutch bond auction was also well received despite the collapse of its government.
In today’s trading session, the Euro has edged higher against the majors ahead of the Dutch proposal on austerity measures set to be sent to the Parliament today for debate this week. Earlier today, the ECB President, Mario Draghi, expressed confidence that the Eurozone economy would benefit from the liquidity injection undertaken by the central bank. In a move to restore confidence, the ECB executive board member, Jose Manuel Gonzalez-Paramo, affirmed that Spain will be able to cover its 2012 financing needs despite rising borrowing costs.
With a light european economic calendar ahead, the Fed's economic assessment and hints to future monetary policy are expected to closely influence risk sentiment today.
Other Currencies – Highlights
The Canadian Dollar has advanced against the US Dollar amid market speculation that higher inflation may prompt the Bank of Canada (BoC) to consider raising its interest rate. Yesterday, the BoC Governor, Mark Carney, reiterated that the central bank might have to increase its benchmark interest rate amid firmer underlying inflation. Markets are expected to closely watch the GDP and manufacturing PMI data scheduled for release next week to predict the current monetary stance of the central bank.
Additionally, easing Eurozone fears following a positive response to European bond auctions strengthened the appeal for high yield currencies.
However, data released yesterday revealed that Canadian retail sales unexpectedly declined for February. This was in contrast to the wholesale sales report released earlier this week which had indicated an unexpected recovery for February.
Euro Weakens Ahead of the European Commission's Decision on Italy
US Dollar Extends Decline on Cautious Fed Commentary
British Pound Recovers as Eurogroup Discusses Brexit