QE or not to QE

Data just out indicated that UK consumer price inflation eased for April. Weak CPI, coupled with a downbeat quarterly inflation report released last week, has further strengthened speculation of additional easing and could weigh on Sterling against the majors in today’s trading session. Turning focus to Europe, ‘Grexit’ chatters took a backseat after German and French finance ministers indicated their willingness for Greece to stay in the Eurozone. Opinion polls in Greece suggest that the conservative New Democracy party is drawing level with the radical left party Syriza. Consumer confidence data in the Eurozone later today may likely prove to be a driving force for the Euro.

Pound Sterling – UK Markets

Sterling has fallen away somewhat against the US Dollar and the Euro in today’s trading session. Data just out revealed that British annual consumer price inflation eased more-than-expected for April, thereby elevating the possibility of a new round of QE. The CPI reading was in contrast to last week’s quarterly inflation report, wherein the BoE had raised its inflation forecast. Additionally, data indicated that annual retail price inflation also dropped, in line with market expectations. However, worries on the fiscal front eased after data revealed that the UK’s public sector borrowing fell sharply for April after rising for two consecutive months. Minutes of the latest BoE’s monetary policy meeting and retail sales data due tomorrow are expected to provide further clarity over the stance the central bank might take in the near future. BoE regulatory body member, Michael Cohrs, stated that UK banks are strong enough to withstand a Greek exit from the single currency union.

US Dollar – US Markets

The US Dollar retreated against the Euro in yesterday’s trading session amid improved risk appetite, following Chinese Premier Wen Jibao’s comments on boosting growth in the nation. The greenback has continued its downtrend against the Euro this morning after France's finance minister, Pierre Moscovici and his German counterpart, Wolfgang Schaeuble, agreed that Greece should stay in the Eurozone. On the macro front, data released yesterday indicated that the Chicago Fed national activity index rebounded sharply for April. Adding to the optimism, the Atlanta Fed President, Dennis Lockhart opined that there was no need for QE3, at present. Existing home sales and Richmond Fed’s manufacturing index are among the key releases expected to be closely monitored during today’s session.

Euro – European Markets

Fears surrounding Greece took a breather following G8 leaders’ calls to keep the nation in the bloc and aided the Euro to consolidate gains against the majors in yesterday’s trading session. Additionally, the Chinese Premier’s call for additional efforts to encourage growth in the nation spurred market speculation of further stimulus and prompted traders to move towards the Euro. In today’s trading session, the Euro has gained marginally against the US Dollar ahead of consumer confidence index data in the Eurozone scheduled for release later today, which is expected to indicate deterioration for May. Moreover, traders remain cautious ahead of the Spanish and Dutch bond auctions due later today. Concerns over stability of the banking system in Spain and political logjam in Greece have kept market participants on edge. Recent opinion polls in Greece suggest that pro-bailout, conservative New Democracy party is drawing level with the left-wing anti-austerity party Syriza. Tomorrow sees the commencement of the much awaited EU summit, wherein the creation of Eurobonds is likely to rule the agenda. In a noteworthy development German Chancellor, Angela Merkel signalled her intention to co-operate with the new French President, Francois Hollande, in the summit.

Other Currencies – Highlights

The Kiwi Dollar has advanced against the US Dollar this morning on receding concerns over growth prospects in China, New Zealand’s second largest trading partner, after data indicated that Chinese leading economic index improved for April. Moreover Chinese Premier, Wen Jiabao, indicated that China will focus on measures to stimulate growth, strengthening market speculation of additional easing. Additionally, gains in equity markets across Asia and a positive opening to European markets offered support to high yield currencies. Moreover, risk appetite received a boost after leaders in the G8 summit urged Europe to undertake measures to boost growth. Meanwhile, a survey conducted by the New Zealand central bank indicated that inflation expectations remain subdued for the second quarter. The trade balance data due later this week is the key economic release, which is likely to be closely monitored by market participants.