Markets Wait for Tomorrow

Yesterday’s data showed that the UK’s services sector expanded unexpectedly for January, thereby offering signals that the British economy has done enough to prevent the BoE from delivering a fresh dose of stimulus in its monetary policy meeting tomorrow. An equivalent figure from Europe and the US also instilled confidence among investors. Meanwhile, the recent strength in the Euro appears to have rattled influential policymakers in the Eurozone. In the midst of prevalent concern over the decline in competitiveness of French firms, the French President urged protection of the Euro from “irrational movements”. Against this backdrop, the ECB’s comments at its post-meeting press conference tomorrow will be closely scrutinised.

Pound Sterling – UK Markets

The Pound garnered traction against the greenback and the Euro in yesterday’s trading session, buoyed by an unexpected expansion in the services activity for January. However, the optimism quickly faded, largely on account of uncertainty surrounding Britain’s monetary and fiscal policy stance. However, upbeat UK services PMI has fuelled optimism that the BoE may refrain from a fresh bout of monetary stimulus in its monetary policy meeting scheduled tomorrow. Meanwhile, the BRC shop price inflation eased to 0.6%, marking the lowest level since November 2009, mainly driven by sharp discounts on electronics and clothes. Today’s figures offered further credence to the belief that easing price pressures on non-food products has propelled the positive change in consumer morale and retail sales for the previous month. However, Halifax house prices data released today has been on the weak side. With today’s light economic calendar, the BoE’s monetary policy meeting and the incoming Governor, Mark Carney’s address to the Treasury Committee tomorrow hold significance for Sterling.

US Dollar – US Markets

The US Dollar has managed to broadly hold its ground against the Euro and the Pound and is trading marginally higher this morning, as traders await further cues to determine the future course of risk sentiment. The ISM services PMI released yesterday indicated that the service sector expanded more than expected for January, in line with the manufacturing activity data released last week. This has instilled confidence among market participants that the economy is moving in the right direction. The Congressional Budget Office also supported this view and indicated that the budget deficit would likely dip below $1 trillion this year for the first time since 2008. However, it indicated that automatic spending cuts taking effect from 1 March 2013 would cripple growth of the economy. Similar concerns were voiced by US President, Barack Obama, as he urged Congress to pass an agreement of limited spending cuts and tax reforms. With US fiscal talks once again taking centre stage and a light domestic economic calendar today, developments from the US political arena are likely to hold sway for the US Dollar.

Euro – European Markets

Strong services PMI data in Germany and the Eurozone alleviated some of the recent political concerns in peripheral economies, leading the Euro to move higher against both the US Dollar and Sterling in yesterday’s trading session. However, weak Eurozone retail figures, partially attributed to weak retail sales in Germany and Spain released last week, limited the upside for the common currency yesterday. The single currency has nudged lower against the US Dollar this morning as traders remained on tenterhooks ahead of the ECB monetary policy meeting tomorrow. Meanwhile, the French President Francois Hollande has urged the EU to take steps to protect the Euro from extreme fluctuations. In the absence of major domestic economic releases today, German factory orders data is expected to garner modest market attention in gauging the performance of the German economy. Additionally, Mario Draghi’s post-meeting press conference and the Spanish bond auctions scheduled tomorrow are expected to offer key clues.

Other Currencies – Highlights

The Japanese Yen slipped to fresh multi year lows against major currencies in yesterday’s session and has continued to hover close to its recent lows against the US Dollar this morning, largely hurt by the BoJ Governor, Masaaki Shirakawa’s decision to step down weeks ahead of the completion of his term. Market participants are fretting over the possibility that a sooner than expected leadership transition in the central bank would bolster the Japanese Prime Minister, Shinzo Abe’s campaign for more aggressive monetary easing in order to combat deflationary pressures. However, BoJ board member, Takehiro Sato, defended the government’s stance, as he indicated that the central bank is not planning to weaken the Japanese Yen to a specific level. On the macro front, today’s machine orders data is likely to be keenly eyed by investors. Additionally, key monetary policy meetings in Europe and Japanese trade data scheduled for release tomorrow are likely to influence the Japanese Yen in the near term.