Greece and Central Bankers in the Spotlight

Market optimism that Greek debt restructuring may go through later today has kept risk appetite intact in today’s trading session. Reports suggesting that the US Federal Reserve is considering a new liquidity move to boost growth has further resulted in flight from safe haven currencies. Traders await the outcome of monetary policy meetings of the BoE and the ECB due today. With decisions likely to maintain status quo, the focus is expected to shift to the ECB’s post-meeting press conference wherein the central bank’s comments on the Eurozone economy will be closely watched.

Pound Sterling – UK Markets

Sterling has spiked against the US Dollar this morning amid market hopes that the BoE will adopt a wait-and-watch mode in its monetary policy meeting due later today. Markets expect the BoE to maintain its benchmark interest rates at record low levels of 0.5% and leave the asset purchase target unchanged at £325 billion. However, optimism over Greek debt swap has limited gains in the Pound against the Euro. Meanwhile, UK’s sluggish growth has fuelled speculation that the central bank may revise its asset purchase target higher in the near future. Additionally, the recent rift in views among the BoE’s policymakers on the necessity of further easing has made minutes of this meeting, scheduled to be released later this month, of even more interest to traders. In a noteworthy comment, Spencer Dale, the Chief Economist of the BoE, indicated yesterday that he expects UK inflation to slow to the central bank’s 2% target by the end of 2012.

US Dollar – US Markets

Speculation of further easing has led to bearish sentiment in the US Dollar against the majors. The Wall Street Journal reported that the US Federal Reserve is considering a new type of bond purchase program called the "sterilised QE" to boost growth and subdue concerns over inflationary pressures. Additionally, risk appetite improved amid reports that 60% of Greek bond holders have agreed to participate in the country’s debt restructuring. Yesterday, data released by Automatic Data Processing suggested a recovery in the US labour market with more-than-expected addition in private sector jobs for February. Against this backdrop, investors keenly await the release of initial jobless claims later today, which are expected to remain steady. Rate decisions in Europe and the UK and the final outcome of the Greek debt swap are likely to set the tone for risk appetite today.

Euro – European Markets

The Euro has gained against the US Dollar and moved closer to the 1.32 mark as concerns over Greek default receded, after reports indicated that 60% of Greek bond holders have agreed to participate in the nation’s debt restructuring exercise. This includes Greece’s largest banks, most of the country’s pension funds and 30 European banks including BNP Paribas, Commerzbank and Societe Generale. Apart from the Greek debt swap deadline, ECB President, Mario Draghi’s press conference following the rate decision is likely to be a key market focus and will be closely watched for cues on the health of the region’s economy and future measures likely to be undertaken by the central bank. In the rate setting meeting, the ECB is widely expected to retain its key interest rate at 1% and not resort to any further easing measure following the infusion of a record €529.5 billion into region’s financial system last week. On the economic docket, German industrial production data due later today is expected to indicate an improvement for January.

Other Currencies – Highlights

The Kiwi Dollar has advanced against its major counterparts after data indicated a significant rise in the nation’s manufacturing activity for the fourth quarter. Additionally, the Reserve Bank of New Zealand (RBNZ) left its official cash rate unchanged at 2.5%, in line with market expectations. The Kiwi Dollar also benefitted from increased risk appetite amongst traders amid optimism that Greece may avoid a disorderly default and reports the US Fed may resort to further easing measures. However, gains in the Kiwi Dollar were limited after RBNZ Governor, Alan Bollard, opined that the “sustained strength” in the currency could diminish the need for interest rate hike. The Governor further warned that although the strong Kiwi Dollar helps to curb inflation, it could be detrimental to the export driven New Zealand economy. The movement in the Kiwi Dollar in today’s trading session is likely to be determined primarily by shifts in risk appetite rooted in updates from Europe.