Central Banks Back in Spotlight

In a surprise move, regulators agreed to ease a key bank rule under the Basel III norms, offering banks more time and greater flexibility to adhere to the proposed banking rules. Whilst the easing of the strict regulations is likely to boost global credit, the impact on today’s session was fairly minimal. Data from the labour market showed that hiring in the US was steady but the unemployment rate was higher than market expectations. In the midst of an accommodative monetary stance adopted by the major central banks, data today showed that investor confidence in the Eurozone continued to improve. Meanwhile, the BoE and the ECB meetings are likely to have a profound influence on the weekly session.

Pound Sterling – UK Markets

In today’s session, the Pound is trading flat against the Euro but has registered a marginal drop against the greenback, as traders await the BoE’s first monetary policy meeting of 2013 later this week. Although, the latest services PMI for the UK showed signs of economic growth tapering off from the sharp rebound witnessed in the third quarter, policymakers are widely expected to leave monetary policy tools untouched, as inflation remains above the BoE’s area of comfort. Meanwhile, in a key development, the UK Prime Minister David Cameron, downplayed the importance of UK’s top notch credit rating and added that the government’s focus would be to maintain the credibility for the deficit reduction programme. Meanwhile, data from the Halifax showed that monthly house prices in Britain rose, reflecting the growing demand for mortgage borrowings in the UK. Markets will be closely watching the BRC retail sales data due for release early tomorrow for further insights into retail sales growth during the holiday period. Additionally, the trade balance and industrial production indicators are other releases to garner attention for gauging the performance of the UK economy in the fourth quarter.

US Dollar – US Markets

The US Dollar advanced against major currencies, ahead of key central bank meetings across the globe. However, gains remained muted, as global regulators backtracked from a stricter proposal on global bank liquidity rules, thereby offering more time for banks to comply with rules demanding higher reserves and allowing a broader range of eligible assets to meet their reserve requirements. Although, hiring kept pace with expectations, the US Dollar dipped against its peers on Friday, as the unemployment rate stayed unchanged at 7.8% for December, higher than the consensus forecasts, thereby adding to the case that the Fed may hold its ultra loose monetary stance for a longer than expected period. However, in line with Fed’s latest minutes, the central bank’s policymakers, Jeffrey Lacker and Charles Plosser sounded hawkish, as they called the Fed to keep an eye on inflationary pressures on the economy. The US economy ended the fourth quarter on a strong footing with the latest ISM data showing robust growth in the services sector along with a recovery in manufacturing activity. With minimal domestic data for the week, focus is likely to shift to external cues for further direction.

Euro – European Markets

The ECB Chief, Mario Draghi, is once again set to hog the limelight in the monetary policy meeting later this week. The ECB is likely to leave its interest rates unchanged, as inflation shows no further signs of easing. The Euro began today’s session on a weak footing against the US Dollar. However, an upbeat Sentix investor confidence data offered some respite to the common currency. In the midst of cloudy global economic prospects, the Basel Committee offered more time for the banks to comply with the stricter banking regulations in order to assist the economic recovery. The move is widely expected to offer a relief to the European financial system, given the prevailing woes in banks of peripheral Eurozone economies. Markets are expected to pay a modest attention to today’s factory gate inflation figures from the Eurozone for gauging the prospects of an ECB rate cut during the course of the year. Additionally, a flurry of Eurozone macro data in tomorrow’s session and Spanish auctions later in the week will set the near term trend for the Euro.

Other Currencies – Highlights

The Canadian Dollar outperformed most of the high yield currencies in today’s session, amid optimism that improving economic prospects will propel the recovery in the Canadian economy. Data on Friday showed that Canada’s unemployment rate unexpectedly fell to a four-year low, while the economy added twice the number of jobs forecast for December. Traders will be closely watching the Canadian manufacturing PMI data scheduled for release later today for gauging the health of the Canadian economy. Moreover, BoC’s Senior Deputy Governor, Tiff Macklem’s statement later this week is likely to shed more light into the monetary policy stance that the central bank plans to adopt in the future. Apart from key housing data from Canada, markets are also expected to keep an eye on developments from the US economy and economic data from China for further direction for the Loonie during the weekly session.