EU Meeting Keeps Risk Alive

Following the decent run of Sterling against the Euro yesterday, there were some worrying signs for the UK economy after consumer confidence unexpectedly weakened for March. This has again boosted speculation of additional easing measures, following dismal GDP data released earlier this week. However, the overall risk sentiment remains on a strong footing in this trading session, as markets expect a positive outcome from the European finance ministers meeting commencing today. In the US, following yesterday’s in-line GDP data, market participants are likely to focus today on some tier-1 economic releases, which include personal consumption expenditure and Reuters/Michigan consumer sentiment index.

Pound Sterling – UK Markets

Weak Eurozone business confidence, coupled with market concerns over Spain’s fiscal situation, had aided the Pound to move higher against the Euro in yesterday’s trading session and the position is holding in morning trading. However, markets continue to weigh up the possibility of an additional round of easing by the BoE, after the OECD indicated that Britain is back in a recession. OECD’s chief economist also opined that the BoE should embark on more quantitative easing “sooner rather than later”. Yesterday’s downbeat housing and money supply reports and today’s consumer confidence release have also given a boost to expectations of further monetary easing. Despite the downbeat consumer confidence data, the Pound has continued to step up against the US Dollar, as risk appetite among traders improved ahead of the European finance ministers meeting due later today.

US Dollar – US Markets

Prevalent optimism over the successful outcome of the EU finance ministers meeting, due today, has prompted traders to shun the US Dollar and move towards high yield currencies. On the domestic front, yesterday’s data was skewed to the upside and dented speculation about QE3, as initial jobless claims declined to the lowest level in almost four years. Quarterly personal consumption continued to grow, while the fourth quarter GDP expanded at expected pace. In tune with sentiment the Philadelphia Fed President, Charles Plosser, opined that markets “should not anticipate additional accommodation" from the central bank. The OECD further poured cold water on hopes of additional QE measures after it predicted that the US economy may grow 2.9% and 2.8% respectively, for the first two quarters. In addition to the EU meeting, the US Dollar is expected to monitor the monthly personal consumption expenditure, consumer sentiment and Chicago Purchasing Managers’ Index data due later today.

Euro – European Markets

Yesterday, a weak Eurozone business confidence reading triggered a sell-off in the Euro against the majors. Additionally, fiscal problems in Spain had grabbed attention, after workers protested against the government’s austerity budget due to be unveiled today. However, the Euro has bounced from yesterday’s lows against the US Dollar and is trading higher this morning, after reports suggested that Eurozone finance ministers are likely to boost the region’s rescue fund in a meeting due later today. German Finance Minister, Wolfgang Schaeuble, affirmed that efforts to raise EU firepower would succeed in alleviating the debt crisis. Further supporting gains in the Euro, data indicated that the annual German retail sales grew more-than-expected, while French consumer spending rose for the first time in four months for February. With only Eurozone consumer price inflation on tap today, the Euro is likely to track news flows emanating from the EU finance ministers meeting and data releases in the US.

Other Currencies – Highlights

The Japanese Yen has advanced against the US Dollar after Japan’s core consumer prices unexpectedly rose for February, thereby easing concerns that the Bank of Japan would undertake bolder actions to tackle deflation. Additionally, a plethora of upbeat economic releases including manufacturing activity, jobless rate and housing starts point towards a rebound in the economic recovery. Market speculation that Japanese companies will repatriate overseas earnings before the end of the fiscal year on 31 March 2012 has also supported gains in the Yen. Meanwhile, data indicating an unexpected decline in industrial production activity for February was taken in stride by traders.