Recession threat returns

In the UK, data just released has indicated that the nation’s GDP contracted a higher-than-expected 0.2% sequentially in the fourth quarter of 2011, raising concerns over the health of the economy. The BoE minutes of the last policy meeting indicated that policy makers had voted unanimously to keep the target for bond purchases unchanged. Market concerns over a possible recession in the Eurozone ebbed slightly yesterday following strong Eurozone and German manufacturing PMI data. Across the Atlantic traders await today’s conclusion of the two-day interest rate meeting.

Pound Sterling – UK Markets

In the early trading session Sterling was trading in a tight range against the majors but has currently edged a little lower against both the Euro and US Dollar. Meanwhile, fears that the BoE will have to ease monetary policy further have resurfaced. Validating these fears the BoE Governor, Mervyn King, opined that slowing inflation has set the stage for the central bank to provide further stimulus if needed. Highlighting the nation’s deteriorating financial health; data released yesterday indicated that UK’s national debt rose above £1 trillion for the first time. Additionally, the IMF has slashed the nation’s 2012 economic growth forecast to 0.6% from the earlier estimate for 1.6% growth. Data just released indicated that, on a quarter-on-quarter basis, the UK economy shrank a higher-than-expected 0.2% in the fourth quarter, compared to the 0.6% growth posted in the previous quarter. Furthermore, the BoE minutes of the latest rate setting meeting indicated that policy makers had voted unanimously to keep the target for bond purchases unchanged.

US Dollar – US Markets

The US Dollar has made marginal gains against both the Pound and the Euro this morning. An upbeat reading for the Richmond Fed manufacturing index yesterday highlighted the strong economic momentum in the US. Further strengthening market perception of an improving economic scenario, the IMF retained its 2012 forecast for US economic growth at 1.8% amid a broadly dismal global growth outlook. Flanked by two housing related releases today, the outcome of the Fed’s two day rate setting meeting is likely to hog the spotlight. While the central bank is certain to leave the benchmark interest rate unchanged, markets keenly await the first ever members’ view on interest rate movements. Traders will also keep an eye on Bernanke’s press conference to gauge the possibility and time frame for any further large-scale stimulus program. We expect the US Dollar to take cues from the Fed’s monetary policy stance.

Euro – European Markets

The Euro strengthened against the majors in early morning trading after data just released revealed a better-than-expected reading for the German business expectations index for January. Additionally, yesterday’s better-than-expected Eurozone and German manufacturing activity helped to ease market concerns over the European economic situation. However, lack of any substantial progress on Greek debt has seen any early morning gains against the majors, evaporating. In an effort to soothe market nerves Greek Finance Minister, Evangelos Venizelos, indicated that he expects to conclude the deal in the next few days and that he has received approval from the Euro group for the same. Meanwhile, the IMF has lowered its economic growth forecast for most of the Eurozone nations and cautioned that the region may enter into a “mild recession” in 2012.

Other Currencies – Highlights

The Australian Dollar has gained against the US Dollar this morning after data indicated a higher-than-expected acceleration in Australian core consumer price inflation for the fourth quarter of 2011. This has cooled market speculation over further rate cuts by the Reserve Bank of Australia next month. Additionally, data indicating an annual growth in the Australian Westpac/Melbourne leading index for November, improved trading sentiment towards the Aussie Dollar. Yesterday, the Australian Dollar was under pressure against the US Dollar after Eurozone finance ministers failed to agree on a debt-swap deal for Greece and called for a greater contribution from private creditors.