European Optimism Wanes

The recent optimism surrounding successful bond auctions by peripheral economies was short lived, as bond yields in Spain and Italy spiralled higher on account of simmering political concerns in these economies. This proved a blessing in disguise for the Pound against the Euro yesterday, as there was not much positive momentum to move Sterling independently. Meanwhile, services PMI in the UK has moved into the expansion territory for January. Going forward, the BoE monetary policy meeting and the incoming Governor’s address to the Treasury Select Committee are likely to provide insights on the future stance of the central bank. The Euro zone retail sales and US services sector data will be eyed in today’s session.

Pound Sterling – UK Markets

Renewed concerns surrounding the political arena in Spain and Italy led Sterling to bounce back against the Euro in yesterday’s trading session. The Pound has managed to hold on to its gains against the single currency this morning after data revealed a better than expected improvement in Britain’s services PMI for January. However, a new bout of monetary stimulus from the BoE remains a possibility, as recent PMI figures have revealed a mixed picture. Meanwhile, the BRC same store sales surprisingly climbed last month, to record the fastest growth in thirteen months, thereby offering initial signs of a recovery in the retail sector. However, the initial euphoria in the aftermath of the upbeat retail sales data soon faded after the NIESR lowered its 2013 growth forecast for the UK economy, citing persistent weakness quite evident from recent economic releases. With few further economic releases for today, insights into the future course of monetary policy stance that the BoE plans to adopt during the course of the year and cues from the European political arena are likely to hold the key to determining the near term trend for Sterling.

US Dollar – US Markets

External cues once again proved decisive for the US Dollar, as the greenback advanced against the Euro in yesterday’s trading session amid political uncertainty in Spain and Italy. Yesterday’s factory orders data provided some respite to investors, as it indicated a sharp monthly rebound for December, albeit lower than market estimates. With the US economy showing signs of progress, the possibility of QE ending sooner than expected seems to be taking a front row again. The Dallas Fed President, Richard Fisher, echoed similar views, as he reiterated his stance to gradually reduce asset purchases as the US economy gathers momentum. Meanwhile, the US Treasury has lowered its projected borrowing by $11 billion to $331 billion for the first quarter of 2013, citing higher cash balance. With the last week’s manufacturing activity showing a better than expected expansion, it remains to be seen whether the ISM services PMI scheduled for release later today offers similar buoyancy to risk sentiment.

Euro – European Markets

The Euro receded from its recent highs and was under pressure against the majors yesterday as political uncertainty in Spain and Italy wiped out the early euphoria amongst traders. With the Spanish Premier facing alleged corruption charges and political uncertainty ahead of Italian elections slated later this month, some volatility in the Euro cannot be ruled out. Meanwhile, the German Chancellor dismissed concerns surrounding the scandal in Spain and provided full support to Rajoy’s government. Moreover, S&P‘s report offered some breathing space for the single currency, as the rating agency stated the Euro-area recovery is picking up momentum. Additionally, services PMI released today in Germany and the Euro zone have surprised investors on the upside, in sync with the manufacturing PMIs and confidence indicators released recently. This has provided some cushion to the Euro against the US Dollar this morning. The Euro zone retail sales data slated later today is not expected to offer a positive surprise, given the lacklustre retail sales data in Germany and Spain reported last week.

Other Currencies – Highlights

The Kiwi Dollar is trading marginally lower against the US Dollar in today’s trading session, largely replicating the prevalent weakness in risk appetite amongst investors. However, the downside risks in the Kiwi Dollar remains limited today on account of positive signals from the nation’s labour market. Data today revealed that wages in the nation’s private sector grew at a steady pace for the fourth quarter. Additionally, tomorrow’s labour market report is expected to show a drop in New Zealand’s unemployment rate for the fourth quarter. Meanwhile, the New Zealand Treasury indicated that inflationary pressures remained muted at the end of 2012. However, the Treasury expects inflation to rise to 1.8% by the end of 2013 compared to a 0.9% rate witnessed at the end of 2012. Apart from tomorrow’s domestic employment report, traders are likely to pay a close attention to political developments and monetary policy meetings in Europe during the course of the week.