BoE Plays Waiting Game

Yesterday, the BoE maintained status quo at its monetary policy meeting and refrained from providing further QE. The central bank seems to have adopted a wait-and-watch approach ahead of the Greek elections on 17 June. Across the Atlantic, the Federal Reserve Chairman yesterday poured cold water on hopes of QE3, resulting in a flight from high yield assets. The situation in Europe looks grim, with Fitch lowering its credit rating on Spain by three notches and downbeat German trade data adding to the gloom. With little on the economic calendar globally, risk appetite is likely to remain subdued in today’s trading session.

Pound Sterling – UK Markets

Conforming to its previous decision the BoE, in its monetary policy meeting yesterday, refrained from additional asset purchases and kept its benchmark interest rate unchanged at current levels, thereby aiding the Pound to consolidate gains against the majors. A surprise rate cut by China, coupled with unexpectedly stable services PMI and stronger than expected annual retail sales as reported by the BRC, also underpinned the positive sentiment. This morning, Sterling is trading on a weaker footing against the US Dollar amid receding hopes of additional easing measures for the US economy. However, mounting concerns over the European debt crisis has continued to favour the Pound against the Euro. Data just released revealed that annual output producer price inflation eased more than expected for May. The BoE/GfK inflation report later today is expected to provide further insights into price trends in the UK. Meanwhile, an array of pivotal releases including the NIESR GDP estimate, industrial and manufacturing production and trade balance, feature on the upcoming week’s economic calendar and are likely to garner increased market attention.

US Dollar – US Markets

The US Dollar is trading higher against the majors in today’s trading session after the Fed Chairman Ben Bernanke abstained from endorsing market speculation over QE3. Hopes of additional easing had grown as key policymakers during the course of the week argued in favour of providing a new round of QE. Moreover, a downgrade of Spanish ratings by Fitch and weak data out of Germany dampened risk appetite further. The US Dollar remained unperturbed even after Fitch cautioned of a US rating downgrade in 2013 amid fiscal deficit concerns. On the macro front, yesterday’s data indicating a more-than-expected decline in initial jobless claims pointed towards an uptick in the otherwise weak jobs market. Additionally, an eighth consecutive monthly rise in US consumer credit hinted at buoyant consumer confidence. A raft of crucial Chinese macro indicators over the weekend is likely to have a significant impact on the overall risk sentiment. Additionally, Reuters/Michigan confidence index and consumer price inflation slated for the week ahead will be closely watched by investors.

Euro – European Markets

The Euro traded on a weaker footing against the majors yesterday as upbeat Spanish and French auctions, accompanied by the surprise Chinese rate cut, was outweighed by lack of hints over QE3 by Bernanke. A three notch downgrade of Spain’s credit rating by Fitch has kept the Euro under pressure against the majors. Additionally, data indicating a sharper than expected decline in German exports and a weak second quarter GDP forecast by the Bank of France has further weighed on the Euro. However, in a move to rescue the Spanish banking system, the nation’s Prime Minister, Mariano Rajoy, indicated that he is in talks with EU leaders over recapitalisation moves. With no other significant economic releases or debt auctions on tap for today, the Euro is set to track developments in the region for further direction. Meanwhile, inflation and employment data in the Eurozone, due next week, is expected provide more hints over the stance that the ECB might take in the near future.

Other Currencies – Highlights

The Japanese Yen has advanced against its major peers this morning as “risk off” sentiment among market participants prompted traders to move towards safe haven currencies. Moreover, an upward revision to the Japanese GDP for the first quarter also supported gains in the Yen. Data indicated that on a sequential basis, GDP in Japan rose 1.2% in the first quarter of 2012 compared to a preliminary estimate of a 1% growth. However, gains in the Yen remain limited amid growing market speculation that the Bank of Japan might add more firepower in its next monetary policy meeting. The nation’s Finance Ministry has warned that a strong Yen and the European debt woes pose a serious threat to the export oriented economy. Underscoring the concerns, data released today revealed that the Japanese current account surplus narrowed more than expected for April. Moreover, Eco Watchers' survey revealed that the assessment of the current as well as future economic conditions declined for May.