Draghi Shifts Gear

Traders appear to have been caught off guard, after relatively positive comments from the ECB Chairman Mario Draghi sent the Euro spiralling higher against the greenback. With markets welcoming the sign of the ECB Chief hinting at abandoning his long cherished dovish stance, the initial trends suggest that 2013 could well prove to be a watershed year for the financial markets. Meanwhile, Draghi’s OMT plan proved to be a masterstroke, as borrowing costs in peripheral nations touched fresh intermediary lows. Policymakers in the BoE seem to be in no urgency to press the monetary gas pedal but weaker UK industrial production figures for November keeps prospect of such an outcome alive.

Pound Sterling – UK Markets

Sterling declined against the US Dollar and the Euro in today’s session, as the latest industrial production figures offered no respite from a spate of weak economic data over the past few days. However, it remains to be seen whether the UK economy has done enough to avoid a contraction in economic growth for the fourth quarter. As expected, the BoE continued to hold interest rates at historical lows and its asset purchase target unchanged at current levels. However, the Pound declined against the Euro in yesterday’s session as the ECB offered no clear signs of lowering interest rates in the near future. Moreover, upbeat comments from the ECB President, Mario Draghi, further supported the Euro. In today’s session, NIESR GDP estimate is likely to shed some light on the likely path of fourth quarter GDP growth in Britain. Meanwhile, next week’s inflation and retail sales figures are likely to have a bearing on Sterling in the near term.

US Dollar – US Markets

Although the outcome of both the key monetary policy meetings in Europe were in sync with broader consensus, the greenback sharply backtracked against the Euro and Sterling, as optimistic comments from the ECB Chief, Mario Draghi, sent a strong signal that the European nations are slowly emerging out of the recent economic crisis. Meanwhile, the improvement in the US labour market remains uneven, as data revealed that more Americans filed applications for unemployment benefits last week. Kansas Fed President, Esther George, warned that the current policy stance could trigger inflationary pressures, a stance which differs from the views of other influential officials, the Minneapolis Fed President, Narayana Kocherlakota and St. Louis Fed President, James Bullard, who shrugged off such concerns. On the macro front, data slated for release later today is projected to show further narrowing of the US trade deficit, supported the continuing trend of rising exports and falling imports. Besides, a flurry of important US economic data scheduled for next week will hold the key for setting the near term direction for the greenback.

Euro – European Markets

The Euro took giant strides forward and is now again flirting closer to the 1.33 mark against the US Dollar, as the evident shift in Draghi’s stance have stoked chatter that the central bank could temporarily suspend any plans for slashing interest rates. The ECB President, yesterday, signalled that the Eurozone is poised to stage an economic recovery in the second half of 2013. Similar views were echoed by the head of Euro area Finance Ministers, Jean-Claude Juncker. Meanwhile, borrowing costs across major peripheral economies declined, with Spanish ten year bond yields slipping below the critical 5% mark after Spain saw a robust demand for its bonds in yesterday’s auction. However, Moody's downgraded Cyprus' bond rating deeper into the “Junk” territory, on prevalent worries about the nation's debt burden. To add to the nation’s woes, EU’s top economic official, Olli Rehn, has ruled out a “haircut” on Cyprus’s debt. With little in store from the Eurozone today, the single currency will monitor overseas events in the near term for further direction.

Other Currencies – Highlights

The Swiss Franc declined against its peers in today’s session, as data revealed that the deflationary trend in the Swiss economy persisted for December. Annually, the CPI for December slipped at a greater than expected pace of 0.4%, matching the decline seen in the previous month. Moreover, a major Swiss bank indicated that it may impose charges on deposits held in Swiss Franc. The Swiss Franc tumbled to the lowest levels in more than a month against the Euro, as the optimism following the ECB monetary policy meeting appears to have fuelled speculation that the ECB would refrain from lowering interest rates in the immediate future. With no major domestic data due today, retail sales and producer and import prices figures scheduled for release next week is likely to hold the key for setting the near term trend for the Franc.