Calls for Easing Intensify

Sterling investors were on the defensive yesterday, as the BoE’s Deputy Governor, Paul Tucker admitted that MPC members are contemplating using unorthodox measures to revive the economy. His colleague, Paul Fisher also joined the bandwagon by reiterating his stance for further easing. Today’s second UK GDP reading has proved to be a non-event, but the weakness in the UK economy has further supported calls from policymakers for further QE. With no clear mandate in the upper house in Italy, market appetite for the nation’s bonds looks to be tested at an auction later today. Across the Atlantic, the Fed Chief’s testimony on monetary policy pacified some fears as Bernanke seemed inclined towards maintaining the current monetary stimulus.

Pound Sterling – UK Markets

The Pound has continued to trade under pressure against the single currency and the US Dollar in today’s trading session amid persistent worries about the UK economy. Today’s second estimate of the fourth quarter GDP has indicated that the UK economy contracted 0.3% sequentially in the fourth quarter, in line with the previous estimate. The dismal economic landscape in the UK was further evidenced yesterday after data from CBI revealed that retail spending continued to weaken for February, impacted by rough weather conditions. Meanwhile, influential policymakers in the BoE seemed inclined towards raising the central bank’s asset purchase target, as the BoE Governor Mervyn King and policymaker Paul Fisher, reaffirmed their calls to restart asset purchases. The BoE’s Deputy Governor, Paul Tucker, in his testimony to the Treasury Select Committee, highlighted the need to explore new tools including negative interest rates in order to boost the beleaguered economy. This has kept the possibility of further easing wide open at the next monetary policy meeting. In the absence of major domestic triggers today, cues emanating from overseas markets are likely to hold the key for determining the direction of the Pound against the majors.

US Dollar – US Markets

The Fed Chairman, Ben Bernanke’s stance to continue with current monetary policy garnered a muted response in the Euro-US Dollar pair yesterday as market sentiment was seemingly weighed down by the inconclusive Italian election outcome. Against the backdrop of the recent calls to taper the bond buying programme, the Fed Chief reassured markets of the Fed’s commitment to strong monetary stimulus. With the deadline for sequester fast approaching, Bernanke also urged lawmakers to defuse the sharp spending cuts set to begin on 1 March 2013. However, consumers seemed little affected by the fiscal follies, as data released yesterday revealed a sharp rebound in consumer confidence for February. It would be interesting to see whether the recent surge in confidence is reflected in durable goods data due later today. Moreover, a surge in new home sales has provided further evidence that the recovery in the housing sector is gaining muscle. In this context, today’s pending home sales would likely remain on traders’ radar. However, most of market focus is likely to revolve around the Fed Chairman’s semi-annual testimony to the House Committee later today wherein he is likely to maintain his dovish tone conveyed in yesterday’s Congress hearing.

Euro – European Markets

Although the single currency is trading higher against the US Dollar in today’s trading session, an inconclusive Italian election result has limited the upside for the Euro. Adding to the woes, Moody’s has warned that recent political instability in Italy has brought fresh concerns to the European financial crisis and increased the risk for the country’s rating downgrade. As the country gears up for bond auctions later today, market will keenly watch whether the nation is able to sell its bonds at lower costs. A rise in bond yields on account of a political stalemate would likely bring the single currency under pressure against the majors. Meanwhile, data released earlier today indicated that consumer confidence in Germany improved for a second consecutive month in March buoyed by improving economic outlook. It remains to be seen whether today’s confidence indices in Eurozone supports the recent uptrend seen in Europe’s largest economy. Additionally, news emanating from the other side of Atlantic would also have a bearing on the Euro in today’s trading session.

Other Currencies – Highlights

The Australian Dollar has declined against the greenback this morning following a weak fourth quarter construction report. Data revealed that the value of construction activity unexpectedly fell 0.1% in the fourth quarter, despite a series of interest rate cuts undertaken by the Reserve Bank of Australia in 2012. This has indeed raised market interest on the further course of action that might be undertaken by the government and the central bank to revive the housing market. However, S&P reaffirmed Australia’s top notch credit rating with a “Stable” outlook, as the economy continued to benefit from the nation’s mining activity and improvement in credit fundamentals. Apart from tomorrow’s housing and private sector credit data from Australia, traders are likely to keep a close eye on events from the US and Eurozone for further insights into market risk appetite. In the midst of simmering worries in the Italian political arena, today’s bond auctions in Italy will be a key trigger for currency markets.