Markets are gearing up for an action-packed trading session, with key policy meetings of the BoE and the ECB due later today. With interest rates expected to be kept on hold by both the central banks, the BoE is likely to announce an additional £50 billion stimulus. The ECB’s post-meeting press conference will also be closely tracked for hints on further liquidity boosting measures likely to be adopted by Mario Draghi.
Turning to Greece, with reports suggesting that an agreement was reached on all but one issue of the proposed austerity plan, markets anticipate a positive outcome on Greek debt talks soon.
Pound Sterling – UK Markets
Sterling has recorded a marginal fall against the Euro this morning, amid market expectation that the BoE will unleash another round of emergency stimulus for the economy. Dismal fourth quarter GDP data, coupled with weakness in the housing market, is likely to prompt the BoE to use additional easing measures, despite the recent improvement on the manufacturing side of the economy.
The central bank is expected to increase its asset purchase target by £50 billion to £325 billion, while it is anticipated to maintain its benchmark interest rate unchanged at 0.5%.
Data just released indicates a higher than expected increase in British industrial production, while the trade deficit narrowed for December compared to the previous month. The NIESR’s GDP estimate for January is also set to grab eyeballs today, especially after its earlier warning that the UK economy may contract in 2012.
US Dollar – US Markets
Confidence surrounding Greek talks over the second financing round from the Troika has placed the US Dollar on a weaker footing against the majors.
Meanwhile, the President of the Federal Reserve Bank of San Francisco, John Williams, rekindled hopes of QE3, after he stated that the Fed may need to buy additional mortgage bonds if the economic expansion falters, or inflation slips below the Fed’s current target rate of 2%. Making matters worse, S&P has warned that the US faces another prospect of a rating cut in the next 6 to 24 months in the absence of a credible medium-term fiscal plan.
Following recent statements by the Fed Chairman, Ben Bernanke, the focal point has shifted to the US job market. Data due today is expected to indicate an increase in weekly jobless claims.
Euro – European Markets
The Euro has advanced versus both the Pound and the US Dollar, amid optimism that finalisation of the Greek debt deal is in the offing. Reports indicate that key Greek political parties have agreed, in principle, on measures required for the nation to receive its next tranche of aid, though details over adjustment to pensions remain unresolved.
With a light economic calendar for the day, all focus rests on the ECB rate setting decision, wherein the central bank is widely expected to adopt a wait-and-watch attitude.
Markets are expected to closely follow the ECB President Mario Draghi’s post-meeting statement, for further cues on action that the central bank is likely to take to tackle the Greek debt crisis. Any indications about further relaxation of the ECB's collateral rules, ahead of the LTRO at the end of this month, will be tracked closely.
Other Currencies – Highlights
The Kiwi Dollar has gained against the US Dollar this morning, after data indicated a more-than-expected drop in the nation’s unemployment rate for the fourth quarter. The unemployment rate in New Zealand fell to 6.3% from a rate of 6.6% posted in the third quarter of 2011.
Additionally, growing optimism over closure of the Greek deal has prompted traders to shun safe haven currencies and move towards high yield currencies. Meanwhile, market seems to have taken the acceleration in Chinese consumer price inflation for January in its stride.
Political Jitters in UK Weighs on Pound Sterling
Euro and Pound Sterling Recover Modestly on Friday
The US Dollar Rallies on Upbeat Data and Hawkish Fed Stance