UK Economy Stalling Again

The latest survey from the BRC painted a bleak picture as British retailers suffered from lacklustre sales during the crucial Christmas period, broadly due to simmering inflationary pressures weighing on consumers. With economic indicators in the fourth quarter offering no major signs of a turnaround, the upbeat third quarter growth figure is fast losing credibility. In a relentless pursuit to weaken the domestic currency, the Japanese Finance Minister unveiled a plan to buy bonds from Europe’s permanent rescue fund by tapping into Japan’s foreign exchange reserves. Meanwhile, unemployment figures, retail sales and key sets of leading indicators from the Eurozone are likely to grab focus in today’s session.

Pound Sterling – UK Markets

Sterling failed to hang on to yesterday’s highs against the greenback and continued its slide against the common currency, as a survey from BRC showed that retail sales in the UK were poor during the holiday period. With Christmas sales disappointing and with PMI releases offering no major signs of an economic revival, the prospect of the UK economy registering a contraction in the fourth quarter seems back on the cards. However, a survey from BCC offered a contrasting picture, as the association indicated that British firms grew more confident in the final quarter of 2012, suggesting that the economy is set for moderate growth in the early part of this year. Meanwhile, Britain's governing coalition parties assured unity until 2015 and reasserted their goal to reduce the nation’s budget deficit. With no major domestic data scheduled for release today, traders will be closely eyeing economic data from the Eurozone and the US in today’s session for further direction.

US Dollar – US Markets

The US Dollar continued to trade close to yesterday’s lows against the Euro in today’s session, after the Japanese Finance Minister, Taro Aso, indicated that the nation would use its foreign-exchange reserves to buy European rescue bonds. However, the greenback nudged higher against other high yield currencies in today’s session, as traders trod cautiously ahead of the commencement of the much awaited fourth quarter corporate earnings season. Meanwhile, “risk on” sentiment received a boost, as latest polls indicate that the Chinese economy grew by 7.8% for the fourth quarter of 2012, thereby ending seven straight quarters of slower growth. Although developments outside the US are likely to act as the key drivers in the near term, traders are also expected to pay passing attention to NFIB’s small business optimism index, which is widely expected to hover close to its multi year lows owing to the delay in reaching an agreement on the fiscal cliff issue. Meanwhile, consumer credit figures are expected to shed some light on economic performance for the fourth quarter, while the IBD/TIPP economic optimism index will offer some clarity regarding sentiment among business houses following the agreement on fiscal cliff.

Euro – European Markets

The Euro managed to stage a recovery against its peers and successfully toppled the 1.31 mark against the US Dollar, as the Japanese Finance Minister indicated that Japan would buy bonds from the ESM in order to assist the Eurozone in countering the region’s sovereign debt woes. Moreover, traders also increased their exposure to the single currency, as prospects of an interest rate cut by the ECB in this week’s meeting seem far fetched. However, latest data showed that the seasonally adjusted German trade surplus narrowed, largely impacted by a greater than expected fall in exports for November. Additionally, the unemployment rate in Italy remained at elevated levels, further highlighting the fragile state of affairs in the Eurozone economy. Unemployment and retail sales indicators from the Eurozone and data for factory orders in Germany will be a key highlight in today’s session, largely due to their influence on the ECB’s monetary policy stance.

Other Currencies – Highlights

The Aussie Dollar declined against the greenback and the Euro in today’s session, as data showed that trade deficit for November widened to $2.6 billion from $2.4 billion in October, despite signs of a pick up in China’s economic growth. The weak data offers strength to the belief that further interest rate cuts by the Reserve Bank of Australia cannot be ruled out. Among other releases, Australian Industry Group and Housing Industry Association reported that the performance of the construction index improved marginally for December. Meanwhile, traders are expected to keep a close eye on tomorrow’s retail sales and new home sales figures for determining the near term trend for the Aussie Dollar. With latest polls projecting a recovery in Chinese economic growth, traders are also expected to stay focused on a raft of economic data from China during the latter half of the week, given its influence on the Aussie Dollar.