QE3 Still On The Horizon

The BoE’s minutes of the last policy meeting has revealed that members had voted 8-1 to leave the QE program unchanged. However, downbeat retail sales just released, easing inflation and calls of more easing by the IMF have strengthened the case for more QE. Meanwhile, markets are expected to remain edgy ahead of the EU summit scheduled later today where the risk of the meeting falling short of expectations is high, given the divide among Eurozone members on growth versus austerity. Cautious comments from the former Greek Prime Minster, Japan’s credit rating downgrade and lowering of Chinese growth forecast by the World Bank have further dampened market sentiment.

Pound Sterling – UK Markets

Sterling is trading lower against the US Dollar this morning. The minutes of the BoE’s latest monetary policy meeting just released indicated that members voted 8-1 to keep its asset purchase target at £325 billion. Additionally, despite subdued inflation pressures, annual retail sales in the UK unexpectedly declined for April. In yesterday’s trading session, the Pound lost against the US Dollar, as lower-than-expected consumer price inflation fanned prospects of further easing by the BoE. Moreover, calls from the IMF for additional QE exacerbated concerns. However, Sterling held its ground against the Euro, as worries over a possible Greece exit from the Eurozone offset speculation of more monetary easing for the UK economy. Meanwhile, the OECD cautioned that the British economy would remain weak in the first half of 2012 and regain momentum in the second half. While today’s CBI distributive trade survey is likely to shed more light on the British retail scenario, market participants keenly await the outcome of the EU summit commencing later today for further hints on Europe’s plight.

US Dollar – US Markets

Escalating global economic woes has continued to underpin gains in the US Dollar this morning. Worries of a Greek exit from the Eurozone were heightened after former Greek Prime Minister, Lucas Papademos, indicated that Greece leaving the single currency union was very much in the realm of possibility. Additionally, market sentiment took a hit following Fitch’s credit rating downgrade of Japan and a cut in the Chinese economic growth outlook by the World Bank. Nevertheless, on the domestic front, the US housing market showed signs of strengthening as existing home sales rebounded more than forecast for April. Against this backdrop, another set of housing data including new home sales and house price index would be closely tracked today. In today’s trading session, market sentiment is likely to remain subdued ahead of the EU summit later in the day. The meeting is expected to provide insights into the stance Germany and France may take in the near future.

Euro – European Markets

OECD report indicating risk of 'severe recession' in the Eurozone cast gloom over markets and weighed on the Euro against the US Dollar in the previous trading session. Adding to the woes, Italy projected that its economy is set to shrink this year amid several downside risks. Meanwhile, better-than-expected consumer confidence data in the Eurozone released yesterday failed to provide respite to the Euro against the majors. The currency has extended its losses against the US Dollar this morning after the former Greek Prime Minister cautioned that the risk of Greece leaving Euro is real and scope to renegotiate the treaty is very limited. With no significant releases or debt auctions slated for the session, all eyes are set on the much awaited European Union summit wherein prime focus rests on the creation of Eurobonds along with other measures to tackle the debt crisis. Additionally, the meeting is expected to provide insights into the German stand on further austerity measures and is important especially after the recent regional election defeat for the German Chancellor’s party.

Other Currencies – Highlights

The Aussie Dollar has slipped against the US Dollar amid fears over a slowdown in the global economy after the World Bank cut its 2012 economic growth forecast for China to 8.2% from a previously estimated 8.4% growth. Moreover, the OECD warned that global economic recovery remains fragile and could be derailed by the ongoing Eurozone debt crisis. Additionally, ‘risk-on’ trading sentiment took a hit, as worries surrounding Greece escalated after former Greek Prime Minister, Lucas Papademos, reportedly warned that Greece could leave the single currency union. On the data front, the Conference Board’s leading economic index in Australia which climbed for March, failed to have any impact on the Aussie Dollar. The manufacturing PMI data from China and Eurozone due tomorrow is expected to provide direction to the Australian Dollar in tomorrow’s trading session.