D-Day for the Pound

The BoE, in its inflation report, appears poised to slash its 2013 economic growth forecast and reiterate that inflation will hover above the target rate until early 2015. With a dark cloud remaining over UK economic recovery, the prospect of the BoE restarting its asset purchases remains on the cards. The ECB President’s positive comments concerning Spain yesterday also weighed on Sterling’s performance. Across the Atlantic, Barack Obama remained tight lipped over the future action course to contain the looming fiscal fiasco, though he unveiled some plans to revive economic growth. Meanwhile, conflicting interpretations of G7 comments yesterday has made the G20 meeting starting on Friday all the more interesting. Today’s US retail sales data also features as a risk event.

Pound Sterling – UK Markets

The Pound again nudged lower against the Euro in today’s trading session, as traders continued to fret over the possibility of the BoE lowering its 2013 growth forecast. Sterling was volatile against the greenback yesterday, as it began on a weaker footing despite inflationary pressures remaining intact for January. However, Sterling staged a recovery following positive comments by the ECB Chief over the progress made by Spain in dealing with its debt crisis. With markets anxiously awaiting BoE growth forecasts, the CBI embraced the widely held view that prospects for the UK economy remain grim, as it lowered its 2013 growth forecast to 1% from its previous prediction of a 1.4% growth, largely due to weakness in exports and business investments. With the economic recovery struggling to gain momentum, today’s inflation report is expected to throw light on the central bank’s inflation projections in the near term and offer some insights into the future monetary policy stance. With most news flow from the inflation report seemingly priced into Sterling, further downside risks to the Pound may remain limited.

US Dollar – US Markets

The US Dollar is trading in a tight range against the Euro and the Pound in today’s trading session, as Barack Obama’s address to the State of the Union failed to offer any fresh insights into looming fiscal concerns, though he reiterated his call for delaying spending cuts through a small budget deal. The speech revolved more around reviving the economy, as he urged Congress to support him in a series of reforms to increase wages, spur investment and boost the job market. Meanwhile, policy makers remain divided over the Fed’s monetary policy stance, as the Richmond Fed President criticised the central bank’s policy stance, while the Atlanta Fed Chief opined that he expects the bond buying to continue through 2013. The recent shift of the US Fed from calendar guidance to conditional guidance has also kept markets guessing on the efficacy of such a move. On the macro front, yesterday’s budget balance data offered some much needed respite on the fiscal front, with the nation posting its first budget surplus in almost five years. It remains to be seen whether investors get further reasons to cheer when US retail sales data is released later during the day.

Euro – European Markets

The ECB President’s upbeat comments on Spain helped the Euro to garner traction against the majors yesterday. With Spain still reeling under political uncertainty the ECB President, in his address to the Spanish Parliament, reassured lawmakers that the nation’s recovery remains on track and Spanish banks were properly capitalised. With the recent currency war gaining centre stage, G7 leaders vouched to stay away from devaluing their currencies in a bid to increase exports. However, mixed interpretation of the G7 statement did not have a material impact on the single currency. The Eurozone industrial production data is the only important event on the economic docket today and is expected to show an improvement for December. Additionally, long term bond auctions in Italy later today will provide hints to how foreign investors are responding to growing uncertainty over the upcoming Italian elections. However, the crucial GDP data across Europe slated for release tomorrow could prove to be decisive for the Euro, wherein expectations of further downside in European economies remain largely on the cards.

Other Currencies – Highlights

The Japanese Yen has climbed against its major peers in today’s trading session, with conflicting signals emerging from the G7 policymakers’ meeting. Although leaders reiterated that they remained opposed to distortion caused by policy actions to currency markets, they refrained from singling out an individual country or exchange rate. Traders await further clarity on this front during the meeting of G20 leaders later during the week. Investors are likely to keep a close eye on Japan’s fourth quarter GDP figures slated for release early morning tomorrow for hints on whether the recent weakening of the Yen proved to be a positive for the overall economy. The outcome of the monetary policy decision also due tomorrow could likely prove to be a non-event, as market participants expect no change in the monetary policy stance, with a new BoJ Governor and two deputies scheduled to take office next month. Retail sales data from the US and Italian bond auctions due later today could have an influence on the Yen.