Draghi Takes the Stage

The BoE is expected to keep its powder dry for another month, as recent cues have offered little incentive for policymakers to alter their current monetary stance. Moreover, the central bank appears to be left with limited options as the British economy is once again perched in a precarious position, given prevalent growth pressures and simmering inflationary concerns. Meanwhile, the ECB also prepares to begin 2013 on a sober note, as policymakers are likely to hold back from an immediate alteration to interest rates. However, going by the recent trend seen in peripheral bond markets, a lot will depend upon the tone of the ECB Chief’s comments.

Pound Sterling – UK Markets

The BoE’s first monetary policy meeting in 2013 promises to remain a low key affair with the central bank widely expected to pursue its “wait and watch” approach, as recent trends from the economy appears to have done little to influence policymakers to switch from their current stance. Although David Miles was the only dissenting member in the MPC calling for an increase in asset purchases, the minutes of today’s meeting - scheduled for release in two weeks - should offer a clearer picture of whether the central bank will be using the QE tool in the immediate future. Meanwhile, fourth quarter GDP data, due later this month, will remain an important near term trigger for the BoE’s policymakers. The Pound is trading flat against the US Dollar and the Euro on the build up to the monetary policy meetings in Europe. Meanwhile, Sterling declined against the greenback in yesterday’s session and briefly dipped below the 1.60 mark, largely hurt by disappointing trade data.

US Dollar – US Markets

With limited cues in store from the US, the greenback is all set to monitor events unfolding on the other side of the Atlantic for a clearer picture regarding market sentiment. The monetary policy meetings in the Eurozone and Britain, coupled with the bond auctions in Spain, are likely to be the trendsetters for today’s session. However, the greenback lost some ground against the Euro and other high yield currencies in the morning session, as today’s Chinese trade data offered credence to the belief that the world's second-largest economy is making its way out of a prolonged period of slowing growth. With the previous figures showing a sharp jump in the number of Americans claiming jobless aid, today’s claimant count data will hold the key to gauging whether the improving trend, following the Superstorm, remains intact. In the midst of the interest in today’s events in Europe, the data for wholesale inventories in the US is likely to have a limited impact on the currency markets. However, CPI data from China tomorrow remains a key event to watch for.

Euro – European Markets

Despite recent revelations highlighting that policymakers in the ECB were open to a rate cut, today’s monetary policy meeting seems poised to witness no change in the central bank’s current monetary stance, as the dramatic change in the global economic landscape could see the ECB postpone the rate cut for a later date. However, the ECB President Mario Draghi’s press conference following the monetary policy meeting will remain a key highlight, as market participants remain hopeful that the ECB Chief will adopt a more positive tone. With the OMT being the most potent tool in the ECB’s arsenal, comments on this front will also be viewed closely. The Euro slipped against the greenback in yesterday’s session, hurt by weak industrial production data from Germany. However, the common currency has recovered from yesterday’s lows against the US Dollar, supported by upbeat trade data from China. With the Spanish ten year yields hovering close to the 5% mark, Spain seems well on course to clear the first bond auction hurdle this year. However, Spain’s heavy financing needs this year keep alive possibilities of the ECB activating the OMT programme.

Other Currencies – Highlights

The Japanese Yen steadily declined against the US Dollar and other high yield currencies in today’s session, as traders continued to fret over the possibility of the Bank of Japan administering more monetary stimulus in its policy meeting later this month. Japanese Prime Minister, Shinzo Abe, underpinned his commitment to monetary easing by urging the central bank to adopt a 2% inflation target. Additionally, “risk on” sentiment remained the theme of today’s session, as Chinese trade surplus for December surpassed market estimates, aided by strong growth in the country's exports. On the economic front, data revealed that leading and coincident index in Japan declined for November. Meanwhile, traders are expected to keep a close track of Japan’s trade balance data, for further clarity on the impact of recent political tensions with China. Although domestic cues remain the key factors determining the trend for the Japanese Yen, the monetary policy meetings in Europe and Chinese inflation readings scheduled for release early tomorrow, are also likely to have an impact on traders.