Market participants reduced their Euro exposures yesterday following a barrage of dismal GDP data in Europe. Yesterday’s weak readings have supported the ECB Chief’s rhetoric of downside risks to the region’s economy and added fuel to the recent debate surrounding the Euro’s strengthening. Against this backdrop, the G20 meeting commencing today could hold some interesting insights from member countries.
At home, the Pound's woes continue as today’s weaker than expected retail sales data has raised fresh concern over consumer spending and the state of the UK economy. Going forward today, investors have their plate full with a raft of economic data scheduled for release across the Atlantic.
Pound Sterling – UK Markets
Dismal fourth quarter GDP data across Europe helped the Pound to garner traction against the single currency in yesterday’s trading session. However, data just released has indicated that retail sales in the UK fell for January, in contrast to the BRC retail sales figures released recently and aggravating the downside risks for Sterling in today’s trading session. Against this backdrop and considering the recent BoE quarterly inflation report, policymakers have started voicing their concerns, as BoE policymaker Broadbent called for new policy tools alongside QE to reignite the faltering economy.
With little on the domestic economic calendar as we approach the end of the week, the BoE’s minutes scheduled next week will be closely monitored for hints on MPC direction. Additionally, markets are expected to keep a tab on labour market and public finances data due for release next week for further insights into the overall health of the UK economy.
US Dollar – US Markets
The upbeat US jobless claims data released yesterday garnered muted response, as dismal Eurozone GDP figures prompted investors to seek shelter in safer assets, leading the US Dollar to nudge higher against the single currency. Meanwhile, the St. Louis Fed Chief indicated that the central bank’s shift towards outright open-ended bond purchases and a move toward conditional guidance has made monetary policy more effective in terms of reviving the job market.
Yesterday’s initial claims data clearly supported this view, as data indicated that the number of people claiming jobless benefits fell more than expected last week.
Meanwhile, the US Senate Democrats have proposed a plan to postpone the dreaded spending cuts from taking effect on 1 March 2013 by ten months. With the deadline fast approaching, it remains to be seen how soon the political logjam in the US can be resolved.
Despite some signs of recovery in the US labour and housing sector, today’s Michigan consumer confidence index is not expected to show a substantial improvement, as pending fiscal issues continue to weigh on consumer sentiment.
Euro – European Markets
The Euro has continued to trade with a downward bias against the US Dollar in today’s trading session as poor GDP data across Europe has put the idea of a potential rate cut by the ECB back on the table. Data yesterday showed that the economy contracted to its lowest level since the first quarter of 2009 while Germany and France, the two largest economies in the Eurozone, contracted more than expected in the last quarter of 2012, with falling exports being the major culprits. However, weak retail sales in the UK have nudged the common currency higher against the Pound in today’s trading session.
The dismal performance of the export sector, coupled with the recent strengthening of the Euro, could serve as a double whammy for the ECB. This has ruffled a few feathers in the central bank, as the ECB indicated that the recent strength in the Euro is dampening inflation and if the trend continues, it might be compelled to cut interest rates.
Apart from the Eurozone trade balance data due later today, a slew of economic releases, especially manufacturing and services PMI, due next week will hold significance.
Other Currencies – Highlights
The Yen has strengthened against the majors this morning ahead of the G20 finance ministers and central bankers two-day meeting kick starting in Moscow later today. Markets expect the group to reaffirm its pledge to “refrain from competitive devaluation”.
With yesterday’s weaker-than-expected GDP data in Japan, it remains to be seen what impact the recent measures adopted by the nation’s Prime Minister might have on the nation’s economy going forward. Additionally, the BoJ left its monetary policy stance unchanged yesterday, a signal that the current central banker is willing to hold fire until the appointment of a new pro-stimulus BoJ Governor. The decision to adopt a status quo approach at the policy meeting was further supported after the BoJ raised its assessment of the economy for the second month in a row for February, indicating that the economy is nearing its bottom.
Brexit fears continue to weigh on Sterling
The Pound continues to weaken following disappointing UK retail sales data