Weale Questions BoE’s Forward Guidance

Recent comments from BoE policymaker, Martin Weale over the effectiveness of the BoE’s forward guidance policy on UK’s economic recovery has put him at odds with the Governor, Mark Carney. Weale indicated that the policy has provided a “modest stimulus not a large stimulus to the economy”. In the Euro zone, Mario Draghi expressed concerns over the Euro zone’s weak recovery and dwindling inflation, while the just out ECB monthly report signaled continuation of loose policy stance, in wake of prevailing headwinds to the economy. Across the Atlantic, recent upbeat economic data and the budget deal have given credence to expectations that tapering could start sooner rather than later. Today’s retail sales data will offer more insights on this front.

Pound Sterling – UK Markets

The Pound is trading higher against the majors this morning and has breached the 1.64 levels against the US Dollar. However, uncertainty continues to loom surrounding the status of the Fed’s QE programme. Although recent domestic macro indicators have pointed towards continuing upward momentum in the nation’s economic recovery, Sterling has steadily nudged lower against both the US Dollar and the Euro over the past two sessions. The despair of Sterling investors was further compounded yesterday after BoE policymaker, Martin Weale, questioned the benefits of the central bank’s forward guidance, stating that forward guidance has very little impact on the economy. The MPC member also opined that there has been a “sharp and unexpected” decline in the nation’s inflation since summer, damping hopes of a swift rate hike and weakening the Pound further. In today’s trading session, the UK Conference Board leading economic indicator will gain modest market attention and will offer a glimpse of future trends of the nation’s overall economic activity. However, important US economic data will determine trading sentiment in the Pound-US Dollar pair in the session ahead.

US Dollar – US Markets

Buoyant domestic economic data during the last week and yesterday’s Congress agreement over the budget deal to end the prolonged fiscal uncertainty in the US had little positive impact on the US Dollar with the downward trend continuing through yesterday. The lack of decisive domestic economic data and a broad demand for the common currency also weighed on the US Dollar yesterday. Meanwhile, the US Dollar has strengthened against the Euro in today’s trading session ahead of the domestic retail sales and labour market data later today. The retail sales report has gained significance in view of the next week’s FOMC meeting, with expectations of a marginal pickup in consumer spending despite last month’s disappointing “Black Friday” sales. Additionally, following last week’s upbeat non-farm payrolls numbers, initially jobless claims numbers will be keenly eyed by market participants in the session ahead for further cues on the US labour market conditions and a positive surprise on this front will offer support to the US Dollar against its peers in the near term.

Euro – European Markets

Amid diminishing concern for the need for additional easing measures, the common currency rose to more than a six-week high against the US Dollar yesterday. The Euro continues to remain supported against the majors after the ECB decided against rolling out new stimulus measures in its last monetary policy meeting. Additionally, indications that the EU finance ministers have moved closer to an agreement on a European banking union yesterday, underpinned demand for the single currency. Meanwhile, the Euro has moved lower against its counterparts this morning after the just out ECB monthly report showed that the central bank will maintain its loose policy stance for a long time, reflecting ongoing downside risks. Additionally, comments by the ECB President, Mario Draghi, highlighting the Euro zone’s weak economic recovery and expectations of prolonged weak inflation has weighed on the common currency. Later today, investors will closely follow the Euro zone industrial output numbers for further insights into the currency bloc’s economic recovery. Additionally, the US retail sales and labour market prints in the session ahead will prove crucial for the Euro against the US Dollar.

Other Currencies – Highlights

The Australian Dollar has weakened to a three-month low against the greenback, while also nudging lower against the majors this morning after the domestic labour market report released earlier today showed that the nation’s unemployment rate climbed to the highest level since 2009, despite the number of employed people in the country rising above expectations for November. This, along with the downbeat consumer confidence out earlier in the week has kept investors on tenterhooks about the state of the Australian economy. The downside pressures on the Aussie Dollar have been prevailing over the past few sessions after a mixed bag of economic data from the nation’s biggest trade partner, China. With no domestic economic data on tap, the Australian Dollar will take direction from news flows emanating from both sides of the Atlantic during the rest of the week. Meanwhile, in wake of a light domestic economic calendar, investors in the Aussie Dollar will closely scrutinise next week’s minutes of the latest RBA policy meeting for further direction to risk appetite.