Inflationary Pressure Remains Elevated

Scope for the Bank of England to restart its asset purchases programme remains limited, as data today revealed that inflationary pressures in the British economy continue to remain at elevated levels. However, it remains to be seen whether this week’s labour market and retail sales data along with next week’s GDP figures alter the current dynamics, thereby prompting policy makers to adopt a more dovish stance. Economic sentiment surveys from Germany and Eurozone due later today are likely to highlight deterioration in market sentiment in the aftermath of weak macro readings from major global economies. However, consumer price inflation in the US is likely to show an easing trend, thereby offering sufficient room to the Fed to continue with its bond buying programme.

Pound Sterling – UK Markets

The Pound failed to recover from its early session losses against the US Dollar yesterday following weak Chinese GDP data. However, Sterling is trading in a tight range against the US Dollar in today’s trading session while it has marginally weakened against the Euro. Data just out has indicated that inflation continues to remain above the central bank’s comfort level for March, as higher energy prices and weaker Pound continued to stoke inflationary pressures. With inflation hovering above the central bank’s target and the economy experiencing sluggish growth, the BoE minutes scheduled for release tomorrow will be keenly watched to decode the central bank’s future policy moves. Additionally, employment data due tomorrow is also expected to grab attention. Although, the labour market has been fairly resilient despite the economy facing substantial headwinds, markets would be keenly watching tomorrow’s data to gauge whether recovery in the job market remains intact. Meanwhile, in the absence of major domestic news today, traders are expected to monitor overseas events for further cues on risk appetite.

US Dollar – US Markets

Dismal New York Empire state manufacturing data further validated concerns surrounding the economic recovery in the US, propelling the greenback higher against the Euro in yesterday’s trading session. Additionally, the NAHB housing index data failed to provide respite, triggering concerns that recovery in the housing market could face headwinds in the future. In this context, housing starts and building permits data due today would be keenly gauged for further insights into the housing recovery. In today’s session, market participants are also expected to track consumer price inflation data to decipher the central bank’s monetary policy moves. With last week’s producer prices edging lower for March, today’s consumer price inflation is likely to ease below the 2% mark. Apart from inflation figures, the nation also sees the release of industrial production data for March which is expected to show a slower pace of growth following the recent weak set of economic indicators. With the US Dollar trading range bound against the single currency this morning, we believe that today’s raft of economic indicators would help in determining the trend in risk appetite.

Euro – European Markets

A string of dire US economic releases lowered risk appetite among investors, leading the Euro to nudge lower against the US Dollar in yesterday’s trading session. However, the common currency has limited its downside against the majors this morning, as investors remain on sidelines ahead of key economic triggers in Europe and the US due later today. On the macro front, yesterday’s Eurozone trade balance data failed to offer respite, as data revealed that Eurozone trade surplus was mainly due to reduced demand for imports, thereby signalling difficulty in increasing domestic demand in the region. In today’s session, German ZEW sentiment indices are likely to show further damage to the economic landscape in the wake of softer macro releases across Europe. A substantial drop in ZEW sentiment indices in Eurozone and German would prove detrimental for the single currency in the near term. Apart from sentiment indices, Eurozone consumer price inflation and Spanish bill auctions are also expected to garner market focus. Additionally, events unfolding on the other side of the Atlantic would also have a bearing on currency markets.

Other Currencies – Highlights

The Aussie Dollar had come under pressure against the US Dollar in yesterday’s trading session, as weak economic data from the US and China prompted investors to seek shelter in safe haven assets. Although the Australian Dollar has managed to recover some of its losses in today’s session, gains remained capped after minutes of the RBA’s last monetary policy meeting revealed that the current benign inflation outlook offers the central bank room to cut interest rates, if required. The minutes also indicated that lower interest rates have begun spurring weaker parts of the economy but it would take some time for full effects to trickle through the economy. Going forward, markets are expected to pay attention to Westpac leading index and NAB business confidence index due later this week for further insights into the nation’s recovery. Meanwhile, a slew of key economic releases from the US are likely to prove crucial for risk appetite in today’s session.