Carney’s Consults Crystal Ball

With the BoE keeping its powder dry, the incoming Governor, Mark Carney offered a fillip to Sterling yesterday as he watered down hopes that the BoE would pursue more aggressive stimulus measures during his tenure. He appears to have back tracked on his earlier comments calling for a policy targeting nominal GDP growth and suggested measures that seem largely consistent with the current BoE stance. Strong industrial production data further bolstered the Pound. Meanwhile, the ECB Chief continues to remain influential, as the Euro tumbled yesterday after he indicated that the recent rally poses inflationary risks, increasing expectations of a rate cut. However, today’s risk appetite seems to be supported following strong Chinese trade data.

Pound Sterling – UK Markets

Incoming BoE Governor, Mark Carney, appeared quite subdued while addressing the UK Treasury Committee yesterday as he called for a debate on inflation targeting and better communication of the bank’s efforts. The future Governor prescribed a flexible inflation target, allowing inflation to stay higher than the targeted rate for as long as three years. Against the backdrop of a less dovish stance by Carney, the Pound rallied against the single currency and the US Dollar yesterday. Additionally, manufacturing and industrial production in the UK grew more than expected for January, providing some much needed relief to Sterling investors. Offering clarity about the state of the British economy, the NIESR indicated that the UK GDP growth would remain flat for three months to January. Meanwhile, the British Prime Minister, David Cameron, opposed the EU's budget for 2014-20 unless some significant cuts are made to the proposed subsidies package. With a light domestic economic calendar today, next week’s consumer inflation data would hold importance for traders.

US Dollar – US Markets

The ECB President’s concerns over the recent high level of the Euro dented market sentiment and led the US Dollar to post decent gains against the common currency in yesterday’s trading session. However, the greenback has failed to gain further traction against the majors this morning as Chinese exports and imports grew more than expected for January, providing further evidence that the global economy remains on track. Meanwhile, the puzzle surrounding the likely end to the Fed’s current bond purchases seems to be getting difficult by the day, as the Chicago Fed President opined that the central bank should slowly taper the bond buying stimulus once the labour market shows improvement. However, yesterday’s less than expected initial jobless claims data has put this concern on the back burner. With little of note in today’s domestic economic calendar, the US trade balance data is expected to garner modest market attention, as it has not proved to be a major market mover in the recent past.

Euro – European Markets

Downbeat comments by the ECB President, Mario Draghi, played on traders minds as the Euro declined sharply against the Pound and other majors in yesterday’s trading session. The ECB President attributed the recent strengthening in the single currency to improved confidence in the Euro zone economy, but maintained his stand that downside risks still prevail. Adding to these woes, Spain witnessed its borrowing costs rise in a bond auction held yesterday, largely affected by ongoing concerns on the political front. In today’s trading session, the single currency is trading close to the 1.34 mark against the greenback. There still remains concerns over the fragile state of the European economy following dismal German trade figures and could limit further upside in the Euro today. In the midst of brewing differences among EU policy makers, a delay in deciding the EU budget for 2014-20 could also dampen sentiment further. With a light economic calendar today, GDP data from major Euro zone nations due for release next week is expected to remain a key event on market radar.

Other Currencies – Highlights

The Canadian Dollar has underperformed against high yield currencies in today’s trading session ahead of the Canadian employment data which is likely to show that domestic jobs growth slowed for January and unemployment rate picked up. Additionally, today’s housing starts and trade balance data will be closely eyed for further insights on the overall health of the Canadian economy. However, further downside in Canadian Dollar was capped after China’s trade surplus exceeded market estimates, largely backed by a sharp growth in exports. Moreover, easing inflationary pressures offered more room for the Chinese central bank to pursue monetary easing measures, if necessary. We believe that today’s domestic macro releases have the potential to decide the near term direction of the Canadian Dollar. With respect to next week, external factors are likely to play a crucial role in determining the trend of the domestic currency due to the lack of major domestic economic triggers.