Market Debates Further Stimulus

Data just released confirms contraction in the British economy for the fourth quarter as expected. This, along with the BoE minutes released earlier this week and supported by committee member Fisher’s dovish comments, has revived hopes of additional stimulus by the BoE. The “risk on” trading sentiment has continued today, with market participants eyeing the Italian bonds auction later today, the outcome of the G-20 meeting during the weekend and next week’s second LTRO operation by the ECB. Risk appetite had gained momentum yesterday, following better-than-expected economic data in Germany and the US. Today, Germany reported GDP figures in line with expectations.

Pound Sterling – UK Markets

The Pound has been trading below the 1.18 mark against the Euro on optimism surrounding the Eurozone, as fears of additional stimulus for the UK economy failed to abate. Paul Fisher, the BoE policymaker, opined that the outlook for the economy remains bleak and did not rule out the possibility of additional stimulus. Data just released indicates that the economy contracted 0.2% sequentially in the fourth quarter, unchanged from the preliminary estimate in line with market expectations. Despite concerns over growth prospects, recent economic data continues to point towards recovery in the domestic economy and is reflected in Sterling trading higher against the US Dollar. Yesterday, the Confederation of British Industry indicated that its gauge for factory orders climbed to a six month high for February, while mortgage approvals for house purchase in the UK rose to a two year high. Soothing concerns further, the European Commission estimated that the UK economy will narrowly avoid slipping back into recession in 2012.

US Dollar – US Markets

The US Dollar has registered declines against the majors this morning, amid optimism surrounding the outcome of the weekend G-20 meeting and the second LTRO due next week. Meanwhile, the recent strong run in US economic data continues to indicate a possible improvement in the global economy. Yesterday, data indicated that weekly jobless claims remained steady at a four-year low, thereby alleviating concerns surrounding the US job market. With inflation figures easing, data due today is expected to reveal an upward revision to the US consumer sentiment, while US new home sales are expected to register a recovery for January.

Euro – European Markets

The Euro has managed to hold on to yesterday’s gains and is trading just below the crucial 1.34 mark against the US Dollar. Markets expect European officials to push other G-20 nations to commit more funds to help tackle the region’s debt crisis. Yesterday, reports indicated that Japan was considering contributing $50 billion to the IMF’s European rescue package. Additionally, traders remain optimistic that the next tranche of liquidity injection by the ECB due next week will enable banks to combat the credit crunch, following a hit on their Greek bond holdings. Meanwhile, the Euro recorded sharp gains against the majors yesterday, following the fourth successive monthly rise in German business climate index for January. The currency remained unperturbed after the European Commission signaled a mild recession for Eurozone this year. Data released earlier today confirmed contraction in German GDP for the fourth quarter as expected.

Other Currencies – Highlights

The Swiss Franc has declined against the Euro this morning amid easing concerns over the European sovereign debt crisis. Additionally, the Swiss industry body, Swissmem, warned yesterday that a tough economic environment would persist for some time and opined that a strong Swiss franc and a stagnating Eurozone would prevent growth for Swiss firms in the mechanical, electrical and engineering sectors in 2012. Meanwhile, markets keenly await Swiss GDP and manufacturing PMI data, due next week, for further cues pertaining to the health of the economy. There could be further action by the central bank if the deflationary trend in the Swiss economy continues.