U.K. Economy Contracts In Fourth Quarter

Revised U.K. GDP data for the fourth quarter has confirmed that the British economy contracted more than previously thought. Meanwhile, market speculation of additional stimulus to the UK economy and encouraging signs from Germany and France has supported gains in the Euro against the Pound this morning. However Eurozone contagion fears persist with Spanish debt issues gaining prominence. Across the Atlantic, market speculation of further easing continues with Bernanke reiterating his dovish stance. Against this backdrop US durable goods orders data due later today are likely to be very closely watched.

Pound Sterling – UK Markets

Yesterday, the Pound rallied towards the 1.60 mark against the US Dollar amid market speculation of a third round of quantitative easing in the US. Additionally, fears over the health of the British retail sector eased after the CBI survey indicated that retail sales in the UK remained stable for March. However, Sterling retreated from its high against the greenback after the BoE Governor, Mervyn King, indicated that prospects of further easing remained uncertain. The Governor’s statement had no major impact on Sterling Euro pair yesterday amid concerns over the health of the Spanish economy after the Bank of Spain confirmed that the economy is suffering its second recession since 2009. Sterling has declined against the Euro this morning with positive news flows from Germany and France. Additionally renewed speculation of further easing in the UK has turned the tide in favour of the Euro. With the final revision to UK GDP released this morning, indicating higher than estimated contraction for the fourth quarter, the Pound is firmly on the back foot against the Euro.

US Dollar – US Markets

The US Dollar has weakened against the Euro following Moody's affirmation of “AAA” credit rating for Germany and positive French GDP data. Additionally, the reiteration of a dovish stance by the Fed Chairman, Ben Bernanke, weighed on the US Dollar against the Euro. Bernanke warned against complacency in policy making and indicated that it is too premature to declare victory in the US economic recovery. A raft of dismal economic data released yesterday further strengthened grounds for additional easing. Consumer confidence for March deteriorated, while other releases pointed towards weakness in housing and manufacturing sectors. Meanwhile, US policymakers remain at loggerheads, with Fed's Richard Fisher and James Bullard rejecting calls for more easing. In today’s trading session, the US Dollar is likely to track durable goods orders data, which is expected to return to growth for February.

Euro – European Markets

The Euro strengthened against the majors due to renewed optimism after Moody's affirmed its “AAA” rating on German government bonds, with a “Stable” rating outlook. Additionally, the upward momentum in the currency was sustained by the final revision of the French GDP figures which showed an expansion for the fourth quarter. However, contagion fears continue to plague the region after the Bank of Spain indicated that data points to a contraction in the first quarter and things could remain difficult for Spain until the second half of the year. Data just released indicates that the Eurozone annual money supply growth unexpectedly accelerated for February, while Italian business confidence improved for March. In this session, market participants await German consumer price inflation and the outcome of Italian bills auction due later today. As Friday draws closer, market participants also await the Eurozone finance ministers meeting for the final decision on the quantum of the region’s bailout fund.

Other Currencies – Highlights

The Japanese Yen has advanced against most of its major counterparts amid market speculation that Japanese companies will repatriate overseas earnings before the end of the fiscal year on 31 March 2012. However, concerns over the Japanese economy remain a cause of concern. Markets are expected to closely monitor retail trade data slated for release later today which is expected to indicate a slowdown in retail trade for February. Meanwhile policymakers at the Bank of Japan have intimated that the central bank is ready to keep monetary policy ultra easy for as long as required, in a move to tackle deflation and support the economy.