BoE Opens Sterling Wounds

The BoE’s gloomy inflation report clearly weighed on the performance of Sterling against the majors yesterday. The economic landscape for the UK economy seems to be deteriorating by the day, as the central bank opined that inflation will remain above its 2% target for almost three more years even with weak economic growth. However, markets hope that tomorrow’s retail sales data might bring some cheer for the Pound. European economies are also not out of the woods yet, as reflected by today’s dismal fourth quarter GDP data in Germany and France, providing some support to the Sterling-Euro pair. The Eurozone GDP report due later today could further accentuate the “risk off” mood prevalent in markets.

Pound Sterling – UK Markets

The Pound staged a sharp decline against the US Dollar and the Euro yesterday and is trading close to the 1.55 mark against the greenback in today’s trading session. Along expected lines, the inflation report released yesterday painted a gloomy picture of the UK economy, as the central bank expects inflation to breach 3% later this year. While the stubbornly high figure had earlier tied the hands of MPC members in adding further stimulus, the Governor left the door ajar for further easing measures, if the need arises. However, he reiterated his rhetoric and put the ball into the British government’s court by indicating that stronger growth would only be possible if the government showed greater appetite for structural reforms. However, there was some respite for the Pound against the Euro in today’s trading session, as weak GDP numbers in key European economies prompted traders to shun the Euro. It would be interesting to see how long Sterling can cling on to its gains in the absence of any positive news flow from the UK. Against this backdrop, retail sales data due for release tomorrow is likely to be keenly eyed.

US Dollar – US Markets

The US Dollar was pretty volatile against the Euro yesterday, which can partly be attributed to conflicting signals emerging from the Eurozone. However, dismal GDP data across Europe earlier today has prompted traders to seek shelter in the safe haven currency. On the other hand, the BoE’s inflation report has continued to weigh on market sentiment, proving beneficial for the US Dollar. On the economic front, a rise in payroll taxes, that had taken place to avert the looming fiscal cliff, is beginning to have a bearing on the US economy as data indicated that retail sales grew at a slower pace for January. However, St. Louis Fed Chief, James Bullard, sounded quite optimistic as he opined that the US economy is on track to recovery and given the recent upbeat data, the central bank might possibly trim down its bond buying program going forward. With recent data showing a steady progress in the job market, the initial jobless claims report slated for release later today is likely to support this improving trend.

Euro – European Markets

With German and French economies moving into contraction territory for the fourth quarter, it is not surprising to see the Euro trade under pressure against both the Pound and the US Dollar in today’s session. The Eurozone GDP data later today is expected to portray a similar picture and should further weigh on market sentiment. However, with recent forward looking indicators in Europe showing signs of improvement, a rebound for the European economy going forward cannot be ruled out. In yesterday’s trading session, the Euro started on a firmer footing against the US Dollar on the back of encouraging industrial production data and decent Italian bond auctions. However, initial gains in the common currency soon evaporated following weak Portuguese unemployment data and amid market speculation that the ECB was worried about the strength of the common currency. With the majority of European economies witnessing downside pressure, a “risk off” trading sentiment in today’s trading session remains on the cards.

Other Currencies – Highlights

The Kiwi Dollar has gained traction against the greenback in today’s trading session following upbeat economic data in New Zealand. The manufacturing activity in the nation expanded at a faster pace for January, reaching its highest level in eight months. Further lending a helping hand to the Kiwi Dollar, data showed that consumer confidence in New Zealand improved for February to its highest level since June 2010. This should provide some room to the Reserve Bank of New Zealand to raise its benchmark interest rate in the future. The release of New Zealand’s retail sales numbers early morning tomorrow could bring about some volatility in the Kiwi Dollar, with market expectations tilted on the upside. With not much on the domestic economic calendar during the next week, the direction of the Dollar is likely to be determined from external factors.