BoE and Fed Ignite QE Hopes

Sterling witnessed a pullback against the majors yesterday after the BoE lowered its 2012 GDP growth forecast in its quarterly inflation report. This spurred market speculation of additional easing in the future. The central bank also forecast higher inflation in the near term. Across the Atlantic, prospects of further stimulus was kept alive after minutes of the Fed’s last policy meeting indicated that “several” officials are open to additional efforts to boost the economy if momentum falters. With Spanish GDP data indicating a contraction this morning and a light European economic calendar ahead, markets will closely eye today’s U.S. jobless claims and regional manufacturing data.

Pound Sterling – UK Markets

Sterling retreated against the majors yesterday following an uninspiring BoE quarterly inflation report. The central bank trimmed its growth forecast for the next two years and warned of a delay in returning to the inflation target. Adding to the woes, Governor, Mervyn King cautioned that the turmoil in the Eurozone poses the biggest threat to the nation already plagued by domestic issues such as fiscal austerity, high inflation and weakness in the banking system. Upbeat data indicating a sharp drop in the British jobless claims for April and a decline in unemployment rate for March failed to have a meaningful impact on Sterling yesterday. The downbeat outlook from the BoE has continued to put pressure on the Pound against its major counterparts this morning. With little of note today in the UK economic calendar, markets are expected to closely follow Prime Minister David Cameron’s speech where he is expected to reiterate his support for Britain’s austerity plan.

US Dollar – US Markets

The US Dollar is trading marginally higher against the Pound and unchanged against the Euro this morning. In the early trading session today the US Dollar slid against the majors amid renewed hopes of more QE after minutes of the Fed’s recent monetary policy meeting. Upbeat GDP data from Japan also eased concerns over the strength of the global economic recovery. However, in contrast to the FOMC minutes St. Louis Fed President James Bullard opined that additional asset purchases by the Fed would risk a surge in inflation. Meanwhile, upbeat economic indicators released yesterday countered calls for additional stimulus. US housing starts registered better than expected growth and industrial production staged a recovery for April following two months of weakness. After Spanish Bond Auctions, Jobless claims and Philadelphia manufacturing data in the US due later today are expected to set the trend for the greenback in today’s trading session.

Euro – European Markets

The Euro gave up its early morning gains against the US Dollar after data revealed that the Spanish economy slid back into recession in the first quarter amid slowdown in exports and household spending. To add to the negative sentiment, the ECB announced that it has stopped offering liquidity to some under capitalised Greek banks. Meanwhile, in a key development in Greece Panagiotis Pikrammenoswas was sworn in as caretaker Prime Minister. Underscoring concerns of Greece’s exit from the Euro bloc, World Bank President Robert Zoellick indicated that Greece's exit could undermine confidence in the Eurozone and trigger another liquidity crisis. In today’s trading session a Spanish bond auction is likely to be closely eyed and is expected to garner decent demand given its small size. However borrowing costs will be keenly tracked since the Spanish 10 year yield has moved closer to its highs recorded in January.

Other Currencies – Highlights

Today the Kiwi Dollar is trading higher against the US Dollar after minutes of the US Fed’s latest monetary policy meeting indicated that several policy makers are considering the need for additional stimulus, if the recovery loses momentum. Moreover, gains in the Asian equity markets following upbeat growth figures from Japan and Singapore boosted risk appetite among traders. However gains were capped as data released earlier today revealed that the Spanish economy slipped into recession in the first quarter of 2012 and consumer confidence in New Zealand declined for May. Additionally producer input prices in New Zealand for the first quarter rose at the slowest pace since the third quarter of 2009. Key releases from the US and bond auction in Spain are likely to set the tempo for today’s trading session. Additionally, market participants closely eye the Reserve Bank of New Zealand’s quarterly inflation expectation report and trade balance data slated to be released early next week.