Risk Appetite Dwindling

The looming uncertainty around policy makers’ stance rattled market participants yesterday, thereby sending high yield currencies lower. The US Fed’s minutes revealed that policy makers could sidestep their targets set for the labour market and may decide to partially withdraw the current monetary stimulus going forward. Sterling encountered pressure yesterday after the BoE minutes showed that more policy makers were inclined towards restarting asset purchases. However, weak PMI readings across Europe have helped the Pound to recover some ground against the Euro today. Additionally, the UK public finances data posted a surplus, in line with the trend seen in the month of January. The US CPI and jobless claims data are likely to be in focus today.

Pound Sterling – UK Markets

The Pound backtracked against the majors in yesterday’s trading session as dovish BoE minutes fuelled speculation of further monetary easing in the near term. Even the buoyant set of employment figures failed to lift market sentiment, as minutes released yesterday revealed that weaker economic data prompted few policy makers to change their stance and call for restarting asset purchases in a bid to tackle the recent slump in the economy. The BoE Governor, Mervyn King and MPC member, Paul Fisher joined David Miles for increasing asset purchases by £25 billion. Against this backdrop, comments from David Miles later today would be closely scrutinised for further cues. There was some relief for the Pound-Euro pair today as downbeat set of PMI releases across Europe strengthened market belief that all was not well in the Eurozone. However, debate to scale down bond purchases in the US has capped the upside movement in Sterling against the US Dollar, with the pair trading close to the 1.52 mark today. Meanwhile, data just out has revealed that the UK economy ran a budget surplus for January, thereby offering some respite on the fiscal front.

US Dollar – US Markets

The FOMC minutes released yesterday suggested a potential exit from the current monetary stimulus sooner than expected, prompting traders to seek shelter in safe haven assets and led the US Dollar to register gains against the single currency and the Pound. Minutes revealed that several policymakers favoured lowering the pace of the current bond purchase program even before the US job market garners substantial momentum. This has indeed raised market interest in the Federal Reserve’s monetary policy meeting scheduled next month for insights into any probable change to the size of the current QE. Meanwhile, data yesterday showed that US housing starts dipped more than expected while newly issued building permits registered a rise. With the US housing sector offering mixed signals, today’s existing home sales would be closely watched to gauge whether the recent upturn in the sector remains intact. Additionally, today’s consumer inflation data would be scrutinised, especially after US producer prices posted a rise for January. Besides, initial jobless claims data and manufacturing data from the Philadelphia region also feature on the economic calendar today.

Euro – European Markets

Downbeat set of PMI releases in Europe along with calls for varying the pace of asset purchases in the US served as a double whammy for the Euro, leading the single currency to nudge lower against the US Dollar in today’s trading session. With consumer confidence data in the Eurozone released yesterday disappointing traders, today’s dismal manufacturing PMI data across Europe has further aggravated the situation. Though German manufacturing activity entered into an expansion mode, the reading was below market expectations. This risks for peripheral economies also seems to be increasing by the day, as S&P warned yesterday that a failure to reach an agreement on a bailout package could likely increase upside risks for Cyprus defaulting on its sovereign debt. This came on the back of the recent warning on the health of Spanish banks. In this context, today’s Spanish bond auctions are expected to garner market attention. Against the backdrop of dismal fourth quarter GDP data in Europe, the EU economic forecasts due tomorrow would likely have a bearing on the Euro in the near term. Additionally, tomorrow’s German Ifo sentiment indices would be keenly watched.

Other Currencies – Highlights

The Swiss Franc is trading close to yesterday’s highs against the Euro and Sterling in today’s session, as data from Switzerland showed that the recent weakness in the domestic currency appears to have brightened prospects for the Swiss economy. The Swiss trade surplus grew more than expected for January, largely supported by a recovery in exports. However, earlier in the week, the SNB Chairman, Thomas Jordan, reiterated the central bank’s commitment to the current policy of capping the Swiss Franc against the Euro. Similar optimism on the economic front was evident in yesterday’s data which showed that Swiss investor sentiment jumped to its highest level in thirty two months for February. Among other macro releases, data showed that money supply growth in Switzerland slowed for January, while the real estate price index nudged higher for the fourth quarter. With no major macro releases scheduled for the week, developments in Europe and the US are likely to determine the direction of the Swiss Franc.