Bad to Worse for Sterling

Although Chinese economic growth data was largely positive today, the impact on high yield currencies was fairly muted, as traders continued to buy the rumour and sell the fact. Meanwhile, Spain cleared its bond auction hurdle with ease, propelling the Euro higher against the majors yesterday. With US jobless claims figures further offering evidence of the labour market regaining strength, murmurs regarding the unwinding of current monetary stimulus appear to be getting louder. Back in the UK, retail sales growth unexpectedly slowed for December. Much will depend on the UK GDP data next week.

Pound Sterling – UK Markets

Sterling was under pressure against the Euro yesterday on account of strong Spanish bond auctions. The Pound has continued to slide against the US Dollar and the Euro, as data today showed that retail sales growth unexpectedly slowed during the Christmas period, further highlighting the weakness seen in the BRC’s survey and elevating the prospect of the British economy recording a negative growth rate for the final quarter of 2012. Next week’s GDP figures will hold the key to gauging whether the UK economy is slipping back into recession yet again. Meanwhile, Prime Minister David Cameron’s much anticipated address on the nation’s EU membership has been postponed, on account of the hostage crisis in Algeria. With the recent data elevating the prospect of the UK economy slipping into a contraction, today’s comments from BoE policymaker, Ian McCafferty, will hold significance for interpreting the future course of action that the MPC members plan to undertake in order to revive growth. Apart from the GDP data employment figures, BoE minutes and public finance data due for release next week will also have a bearing on the near term trend for Sterling.

US Dollar – US Markets

The noticeable weakness in the greenback against the single currency yesterday was largely due to abating concerns in peripheral economies, especially Spain. However, the US Dollar strengthened against Sterling. The number of Americans claiming jobless benefits slipped to the lowest level in five years, signalling that the expiry of the current monetary stimulus could be sooner than envisaged. However, the Atlanta Fed President, Dennis Lockhart, dismissed such speculation by arguing that the Fed would continue its asset purchases into the second half of 2013. Meanwhile, low mortgage rates in the US continued to propel housing demand, as data yesterday showed that housing starts in the US surged to a multi-year high for December. Despite Chinese economic growth data surprising on the upside and with US equity markets climbing to multi year highs, the greenback moved higher against the majors in today’s trading session. With an eventful week coming to an end, all eyes will hover around today’s Reuters/Michigan consumer confidence data to monitor the strength of the nation’s retail sector.

Euro – European Markets

The Euro stayed close to yesterday’s highs against the Pound this morning, largely supported by Spain’s success in comfortably auctioning its bonds. Spain witnessed its borrowing costs drop and demand remained robust, adding to evidence that the prospect of the ECB intervening in peripheral bond markets continues to alleviate the region’s debt problems. Against this backdrop, the EU budget enforcer, Olli Rehn, stated that falling borrowing costs have significantly lowered pressure on Spain to seek a bigger bailout. Meanwhile the ECB, in its monthly bulletin, reaffirmed ECB Chief Mario Draghi’s statements by signalling that inflation would fall below its target rate during the course of the year, while the economy would gradually recover in the latter half of 2013. Going forward, the next week is likely to assist in gauging the current trend in Eurozone economies, as a key set of leading indicators and PMI readings are expected to shed light on the health of the region’s economy in the initial phase of 2013.

Other Currencies – Highlights

The Kiwi Dollar has declined against the US Dollar this morning, on account of the prevalent “risk off” sentiment in markets. Additionally, the inflation reading in New Zealand has stoked speculation that the Reserve Bank of New Zealand might lower its interest rate in the near future. Data earlier today showed that annual consumer price inflation rose less than expected to 0.9% for the fourth quarter, outside the 1% to 3% target range of the Reserve Bank of New Zealand and much lower than market expectations of a 1.2% rate. However, losses were somewhat limited, as data showed that Chinese GDP grew at a better than expected pace for the fourth quarter, thereby ending seven straight quarters of slowing growth. Additionally, Chinese industrial production and retail sales also surpassed market expectations. With no major domestic data due for release next week, traders are expected to keep an eye on external cues for further direction.