Sterling Dives on QE Risk

Although the recent set of economic data portrayed weakness in the UK economy, the labour market appears to be holding its own, as claimants for jobless aid declined for January. Meanwhile, the BoE’s minutes showed that more MPC members have joined the bandwagon to increase the asset purchase program. Yesterday’s data indicating a revival in leading indicators in Germany and Eurozone should come as a relief, following a spate of weak readings over a couple of days. The minutes of the Fed’s last monetary policy meeting scheduled later today will garner attention in gauging the timing of an early withdrawal of the current stimulus.

Pound Sterling – UK Markets

Market speculation of a possible credit rating downgrade of the UK was enough to put the Pound on a back foot against the majors in yesterday’s trading session. Sterling has continued its downtrend against the US Dollar and the euro this morning after minutes of the BoE’s latest monetary policy meeting revealed that MPC members voted 6-3 to keep asset-purchases unchanged. Meanwhile, data showed that the number of people claiming jobless benefits in the UK dropped more than expected for January. Steady improvement in Britain’s labour market remains a prominent highlight in the distinctly weak economic landscape. With the majority of economic data out for today, external market cues will hold significance for further direction to Sterling against the majors. Additionally, public finance data due tomorrow is expected to garner market attention, given the growing fears surrounding the UK’s top notch credit rating.

US Dollar – US Markets

“Risk on” sentiment has increased amongst investors after data released yesterday showed that ZEW economic sentiment index rose more than expected for February, leading the US Dollar to trade lower against the single currency in today’s trading session. Additionally, US equity markets closed at 5 year highs yesterday, bringing more cheer to investors and prompting an increase in exposure to high yield assets. However, the greenback has moved higher against the Pound amid persistent concerns surrounding the UK economy. Yesterday’s NAHB housing data poured cold water on the recent buoyancy seen in the housing sector, as data indicated that homebuilders’ confidence unexpectedly deteriorated for February. It remains to be seen whether housing starts and building permits due later today will show similar concerns. Meanwhile, all eyes will hover over the minutes of the Fed’s latest monetary policy meeting later, for clues to the likely end of the current stimulus programme. Expectation of the tapering of the QE program remains, but any discussion for an earlier than expected withdrawal of the current monetary stimulus could have a bearing on the currency.

Euro – European Markets

With the ZEW economic sentiment surpassing market expectations, the Euro staged a recovery against the US Dollar in yesterday’s trading session. The recent improvement in forward looking indicators has provided some breathing space to the Euro-area, amid recent market concerns following dismal GDP data in peripheral European economies. The more than expected rise in Eurozone and German economic sentiment indices has further validated hopes of the Eurozone economy staging a recovery in 2013. In this context, today’s Eurozone consumer confidence data ahead of the PMI releases across Europe due for release tomorrow, will likely shed light on the performance of the region’s economy. Additionally, an announcement of the second batch of 3 year LTRO repayments tomorrow will garner market attention. Meanwhile, with yesterday’s Spanish short term bond auction registering a good response, it remains to be seen whether the nation is able to garner demand in its triple bond auction tomorrow. Traders are also likely to keep a note of events unfolding in the Eurozone’s political arena, especially ahead of Italian elections on Sunday.

Other Currencies – Highlights

The Aussie Dollar has nudged lower against the US Dollar in today’s session after data revealed that wage inflation in Australia remained less of a threat, thereby offering room for the Reserve Bank of Australia to undertake further interest rate cuts. Australian wage price index rose to 0.8% in the fourth quarter, which was sharply below the central bank’s comfort zone of 4.5%. The central bank, in its latest monetary policy meeting, had indicated that the RBA continues to study the impact of the recent rate cuts on the Aussie economy. Among other macro data, the Westpac leading index indicated that the Australian economy showed signs of moderate pickup in growth for December. With no major domestic releases slated for the week, traders are likely to keep an eye on key economic indicators from the Eurozone and the US for further direction to the Aussie Dollar.