Draghi/King in the Spotlight

Europe’s debt woes face a litmus test today in the form of Spanish and Italian debt auctions which are likely to be crucial for their respective credit ratings. With the ECB policy meeting likely to offer little in terms of major policy changes, markets are expected to focus on the post-meeting joint conference by Mario Draghi and Mervyn King regarding comments on the European Financial Stability Facility (EFSF). At home, the BoE rate setting meeting, scheduled for today, is also expected to maintain an unchanged monetary policy stance. Data just released revealed that industrial production dropped for November.

Pound Sterling – UK Markets

Sterling is trading under pressure against both the Euro and the US Dollar ahead of the BoE’s rate setting meeting slatedfor later today, wherein the central bank is likely to leave its benchmark interest rate and asset purchase program unchanged. However, it is widely expected that the MPC may resort to additional stimulus post the release of the quarterly inflation figures in February. Wider trade deficit numbers and easing shop price inflation figures, released yesterday, have highlighted the fragile state of economy. The drop in exports has fuelled speculation that the BoE may induce additional easing in the near future to spur growth. Data just released indicates that industrial output in the UK declined for November. In a significant development the British Chancellor, George Osborne, confirmed that the nation would release more cash to the IMF to fund bailouts, but not if it is earmarked for the Eurozone.

US Dollar – US Markets

The US Dollar has strengthen significantly against Sterling yesterday, but has since levelled off. Yesterday’s much awaited Federal Reserve’s Beige Book survey revealed that US economic activity expanded “at a modest to moderate pace” in the latter part of 2011, confirming the recent upbeat economic data. Adding to optimism the Philadelphia Fed President, Charles Plosser, opined that the central bank may have to tighten monetary policy before mid-2013, as the US economy is expected to fare better in 2012. Data slated for release later today is expected to indicate an improvement in US retail sales for December. Other economic releases on tap today include initial and continuing jobless claims and business inventory numbers.

Euro – European Markets

The Euro has gained against Sterling and the US Dollar this morning ahead of the ECB meeting later today. The ECB, in its first rate setting meeting of the year, is expected to leave its benchmark interest rate unchanged at current levels. More eagerly awaited are comments by the ECB President, Mario Draghi, on the outlook for the region,along with his stance on further easing and the EFSF. Today’s Italian and Spanish bond auctions, worth a combined €17 billion, are also expected to influence trading sentiment in the Euro. Meanwhile, data slated for release later today is expected to indicate that industrial production in the Eurozone declined for the third straight month for November.

Other Currencies – Highlights

The Yen has weakened against most of the high yield currencies this morning after the Federal Reserve indicated yesterday that the US economy continued to expand during the latter part of 2011. Easing inflation in China, coupled with better-than-expected industrial production figures in India, has eased concerns over the health of the major Asian economies. Japanese economic data was mixed with the country’s leading index and bank lending registering a rise, while the current account surplus narrowed substantially.