EU Budges on Budget

With recovery in the UK showing no signs of gaining pace, there is a growing belief that in its inflation report scheduled for release on Wednesday, the Bank of England might slash its economic growth forecast for the current year. Moreover, the central bank is expected to warn that inflation would stay above the target rate until early 2015. In Europe, the much awaited 2014-20 budget was passed by EU leaders on Friday following a marathon discussion. With little in terms of economic releases today, the focus shifts to finance ministers meeting later today to discuss aid to Greece and Cyprus and GDP figures across Europe scheduled for release later in the week.

Pound Sterling – UK Markets

The Pound nudged higher against the Euro on Friday, as political concerns in the Eurozone prompted traders to switch to safe haven assets. Moreover, EU leaders agreed to usher in budget cuts, a notable victory for the UK Prime Minister who spearheaded the campaign for spending cuts in the region. Additionally, upbeat Chinese and US trade data bolstered market sentiment and led Sterling to cross the 1.58 mark against the US Dollar on Friday. In the aftermath of a weak set of economic indicators from the UK, the BoE, in its inflation report, due later in the week, is likely to lower its 2013 economic growth forecast for the UK economy, possibly weighing on Sterling’s performance in today’s session. Moreover, the central bank is likely to reiterate its stand that inflation would not fall below the target rate for some time. In the midst of weak growth coupled with simmering inflationary pressures, it remains to be seen whether the BoE restarts its bond buying programme any time soon. With little of note in today’s macro calendar, consumer price inflation data scheduled tomorrow is expected to garner market attention.

US Dollar – US Markets

The initial euphoria surrounding the EU budget deal soon faded as the US Dollar nudged higher against the single currency in Friday’s trading session. The keenly eyed December trade balance figures indicated that the US trade deficit narrowed to a three year low in December partly attributed to the rise in exports of industrial supplies and materials. With trade deficit showing signs of noticeable improvement, a likely upward revision to the US fourth quarter GDP remains on cards. Also, the optimism surrounding global economic recovery remained intact following better than expected trade data from China. With no major domestic economic releases expected, market focus is expected to shift to external cues, especially Europe, in today’s trading session. Apart from this, traders will also keep an eye on the President Obama’s speech to the State of the Union due tomorrow for his views on how he plans to proceed for the next four years and his likely take on fiscal consolidation. This is viewed as an important event risk for the US Dollar ahead of the scheduled start of automatic spending cuts on 1 March 2013.

Euro – European Markets

An agreement between EU leaders on the long term budget for the region failed to support the Euro on Friday. EU leaders, after a long debate, finally agreed upon a plan to cut the annual budget by 3.3 percent for the period 2014-20, marking the first ever reduction in the Union's annual budget. However, the Euro continued to buckle against the majors on Friday as recent comments from the ECB President along with political uncertainty in Spain and Italy proved a dampener for the single currency. Meanwhile, the war of words in Europe continues, with the ECB executive board member, Joerg Asmussen, opining that problems within France are dragging the nation’s growth lower and not the exchange rate. This is in sharp contradiction to the French President’s recent comments wherein he advocated a stronger Euro as essential to the nation’s economic recovery. With the Euro recovering some of its losses against the majors this morning, markets look forward to the Eurozone finance ministers meeting in Brussels later today aimed at discussing the working of the region’s rescue fund and debt problems in Greece and Cyprus.

Other Currencies – Highlights

The Japanese Yen has continued to advance against most of the high yield currencies in today’s trading session after Japanese finance minister, Taro Aso, on Friday indicated that the domestic currency has declined too rapidly since November 2012. However, the Asian Development Bank President, Haruhiko Kuroda, a potential candidate for replacing the current BoJ Governor, Masaaki Shirakawa, stated that there is room for the BoJ to inject additional monetary stimulus for the current year. Traders are expected to closely follow Japan’s fourth quarter GDP data due for release later during the week for insights on the influence of the weaker Japanese Yen in reviving the nation’s economic growth. Markets also await the outcome of the G20 meeting scheduled later this week to gauge the reaction of influential policymakers on steps taken by the BoJ to tackle the nation’s deflationary problems.