EU Summit in Focus

With two major events – ECB’s liquidity operation and Bernanke’s testimony - out of the way, the focus has shifted to headlines emerging from the EU summit. The European Council President, Herman Van Rompuy, stated that Eurozone leaders are likely to reassess the adequacy of the overall ceiling of the EFSF and the ESM only by the end of March 2012. Meanwhile, data released earlier today indicated an unexpected monthly decline in German retail sales, leading to gains for the Pound against the Euro. Also aiding Sterling is the just announced higher than expected rise in UK’s construction PMI for February.

Pound Sterling – UK Markets

Sterling has breached the 1.20 mark against the Euro and is trading higher, amid optimism that the UK may avoid slipping into a double-dip recession. Data just out indicates that the construction PMI in the UK has risen more than expected for February. Yesterday’s PMI reading confirmed that manufacturing activity in the UK continued to expand for February, though at a slower pace. The recent upbeat data has pared expectations that the BoE will pump more money into the economy. Meanwhile, MPC member, David Miles, backed further easing and opined that more QE enables the BoE to bring interest rates back to normal sooner than otherwise. With no further economic releases on the deck today, investors await the BoE’s monetary policy decision scheduled next week.

US Dollar – US Markets

The US Dollar registered gains against the Euro this morning as weak set of economic indicators spurred buying in safe haven currencies. Disappointing retail sales data from Germany today, coupled with dismal US manufacturing and Eurozone unemployment data yesterday, have stoked fears over the health of the economic recovery. Gains in the US Dollar were further supported after Fed policymakers - Atlanta Fed President, Dennis Lockhart and St. Louis President, James Bullard - voiced objection to the need for additional stimulus for the economy. This comes on the back of Ben Bernanke’s testimony earlier in the week which provided no hints of further easing in the US. With a light economic calendar this session, we expect the US Dollar to take cues from the outcome of the EU summit which is set to wind up today.

Euro – European Markets

The Euro is trading on a weaker footing against the majors after German retail sales unexpectedly registered a monthly decline for January. Additionally, concerns regarding adequacy of the firewall against sovereign defaults rose after the European Council President, Herman Van Rompuy, stated that Eurozone leaders are likely to reassess the adequacy of the overall ceiling of the EFSF and the ESM only by the end of March 2012. Further denting sentiment, data released yesterday indicated that the region’s unemployment rate stood at a 14-year high for January, while Bundesbank President, Axel Weber, warned that the Euro is set to weaken as Eurozone has the weakest growth prospects globally. In today’s trading session, markets are keeping a tap on the Eurozone producer price index data due later today and news flow emanating from the EU summit.

Other Currencies – Highlights

The Japanese Yen has registered losses against its major counterparts amid worries surrounding the nation’s economy. Data released earlier today indicated that Japanese core consumer price index declined, thereby fanning speculation the central bank may expand its monetary stimulus to meet its inflation goal of 1%. Additionally, a rise in the Japanese unemployment rate and a sharp decline in household spending have further painted a fragile picture of the economy. All eyes are now set on the Bank of Japan’s policy meeting scheduled in mid-March for cues on the central bank’s stance on the economy.