UK Inflation Remains High

The continuing vulnerability of the Pound against the majors has again reminded traders that all is not well in the UK economy. The BoE’s inflation report tomorrow is definitely a risk to Sterling, wherein a downward revision to the economic growth forecast cannot be ruled out. Meanwhile, data just out has indicated that consumer price inflation has continued to remain above the central bank comfort zone, providing some explanation to the recent unchanged monetary policy stance. Across Europe, discussions to provide some respite to peripheral Eurozone economies continue at the region’s finance ministers meeting in Brussels. However, the US President’s State of the Union address early tomorrow could prove decisive for market sentiment.

Pound Sterling – UK Markets

Market speculation that the BoE might lower its 2013 economic growth forecast for the nation in its inflation report due on Wednesday, has continued to cause the Pound to lose steam against the Euro and the US Dollar in today’s trading session. The central bank might also warn that inflation will remain above its 2% target until early 2015. Meanwhile, data just released has indicated that annual consumer price inflation in the UK came in at 2.7% for January, unchanged from the last month. Persistent high inflation is dampening consumer sentiment and is proving detrimental to the UK economy, offering little room for the BoE to manoeuvre with its policy tools. With inflation still hovering above the central bank’s target rate, it remains to be seen what action the central bank Governor could possibly take to counter high inflation and revive the economy. Meanwhile, the housing sector continues to face headwinds, as data released earlier today indicated that RICS house price balance dipped more than expected for January. The BoE inflation report tomorrow will be closely watched for the central bank’s take on economic growth and inflation prospects.

US Dollar – US Markets

The greenback is trading marginally higher against the Euro this morning ahead of US President Barack Obama’s State of the Union address early morning tomorrow, wherein he is expected to shed light on the stance that the government is likely to adopt in the near term to revive the economy. Additionally, his take on the looming spending cuts set to begin on 1 March 2013 will also be closely watched. Meanwhile, chatter relating to the likely end of QE refuses to wane as the Fed’s Vice-Chairman, Janet Yellen, indicated that as long as inflation remains in check, the central bank’s bond buying programme is appropriate to bring an improvement in the job market. With last week’s CBO release indicating that the government would report a smaller budget deficit for 2013, today’s monthly budget statement for January is expected to reaffirm this upbeat view. Additionally, markets are expected to pay passing attention to NFIB small business optimism index due for release later today.

Euro – European Markets

A warning from ECB council member, Jens Weidmann, that Euro devaluation would hurt the economy prompted the single currency to move higher against the US Dollar in yesterday’s trading session. However, with light Europe specific news on the calendar today, the Euro has slipped marginally against the US Dollar, as persistent worries in the Eurozone political arena failed to lift market sentiment. Meanwhile finance ministers, in their meeting that commenced yesterday, have asked for a private study of anti-money laundering laws that Cyprus has adopted, without throwing light on details of the bailout for the nation. This should keep investors on the edge as the meeting moves into the second day today. However, Moody's provided some ray of hope following its projection of a modest recovery in G20 advanced economies for 2013. Against the backdrop of a light economic calendar today, the ECB President’s comments later today will be deciphered for further insights into the recent war of words among the region’s policymakers relating to the Euro.

Other Currencies – Highlights

Yesterday, the Aussie Dollar came under pressure against the greenback after data showed that new home loans in Australia unexpectedly declined for December, a sign that the building sector is still not out of the woods. This should serve as a reminder to the Reserve Bank of Australia, as the housing construction sector has failed to bounce back despite four interest rate cuts by the central bank in 2012. The downward trend in the Australian Dollar against the majors has continued this morning. The positive business confidence data for January released earlier today failed to lift market sentiment towards the Aussie Dollar. With little on the domestic economic calendar today, consumer price inflation expectations data due later in the week is likely to garner moderate market attention. With annual inflation currently within the central bank’s target band of 2% to 3%, it should not prove to be a major market mover for the Australian Dollar. With Chinese markets closed for a holiday during the week external factors, especially from Europe and the US, could serve as a determinant for market risk appetite in the near term.