The recent volatility in currency markets have made key policy makers jittery and this sentiment was shared by the ECB Chief, Mario Draghi, in his testimony before the European Parliament yesterday. He reiterated that the Euro's appreciation could prove detrimental to the region’s economic outlook. Tomorrow’s minutes of the BoE’s last monetary policy meeting are likely to offer Britain’s view on this matter.
Meanwhile, the ZEW sentiment indices in Germany and Eurozone have had little bearing on the Euro, despite results posted on the upside of expectations. Traders are also likely to keep a note of today’s NAHB housing data in the US.
Pound Sterling – UK Markets
The Pound slipped to its lowest level in seven months against the US Dollar in yesterday’s session, as traders continued to fret the possibility of the BoE injecting an additional dose of monetary stimulus in order to counter Britain’s economic weakness. Moreover, the BoE policy maker, Martin Weale, endorsed the currency’s decline, saying it may help boost exports. However, in the absence of major domestic news, Sterling has managed to hold its ground against the majors today.
Markets keenly await minutes of the BoE’s latest monetary policy meeting scheduled for release tomorrow. It remains to be seen whether policy makers will continue to maintain their stance that the real exchange rate was still above the level required to assist the economy. Additionally, with recent indicators painting a gloomy picture for the UK economy, there is a modest possibility that other policy makers might have joined the MPC member, David Miles, in calling for an increase in the size of asset purchases.
Additionally, tomorrow’s UK jobs data is keenly eyed and is likely to provide some insights into the state of the labour market.
US Dollar – US Markets
A US public Holiday and a lack of triggers across the globe held the US Dollar in a tight range against both the Pound and the Euro in yesterday’s trading session. Meanwhile, the ECB President, in his speech yesterday, expressed concern over the near term outlook for the Eurozone.
With US markets resuming normal operations today, investors keenly await the release of the NAHB housing market index for February. On the back of cheaper borrowing costs and gradual improvement in the labour market, today’s data is likely to show a modest improvement after settling at a six-year high last month. In this context, tomorrow’s housing and building permits data would be keenly watched to gauge whether the housing sector has been to able to sustain its recent recovery.
Additionally, tomorrow sees the release of the much awaited minutes of the Fed’s latest monetary policy meeting. With recent voices echoing for tapering the bond purchase program amid improving economic prospects, any indication on this front could prove decisive for the US Dollar.
Euro – European Markets
The ECB Chief Mario Draghi, in his quarterly hearing at the European Parliament, reiterated his earlier stance that the exchange rate is not a policy target, but was important for growth, price stability and a stronger Euro posed a downside risk to inflation and a threat to Euro-area recovery. However, his cautious comments had a muted response, as the single currency remained broadly in a tight range against the majors in yesterday’s trading session. Meanwhile, the ECB policy maker, Ewald Nowotny’s remarks that the common currency is moving within its standard ranges limited the downside for the Euro.
However, given last week’s dismal GDP data and recent downbeat comments from the ECB President, any negative surprises could weigh on the Euro’s performance. Against this backdrop, tomorrow’s Eurozone consumer confidence data would be closely watched for further insights into the consumer sentiment.
Other Currencies – Highlights
The Japanese Yen has advanced against its major peers in today’s trading session after Japanese Finance Minister, Taro Aso, indicated that the Japanese government has no plans to buy foreign currency bonds as a part of the nation’s monetary easing plan. Additionally, S&P reaffirmed its long-term credit rating on Japan at “AA-” with a “Negative” outlook.
However, hopes of an aggressive round of monetary stimulus by the BoJ remains on cards, as minutes of the BoJ’s latest monetary policy meeting indicated that policy makers stay committed to combat deflationary pressures in the economy. On the macro front, data showed a marginal pick up in Japanese and Tokyo department sales for January.
Meanwhile, traders are expected to keep a close eye on the trade balance data scheduled for release early morning tomorrow to gauge the positive influence of a weaker Yen.