Markets Take a Pause

With a quiet session ahead on account of a holiday in the US, today’s EU finance ministers meeting in Brussels related to the implementation of the ESM and the situation in Cyprus holds interest. Meanwhile, signs of political change continued to emerge from Europe, as the German Chancellor's party lost a regional election in one of the country's most populous states. Reports during the weekend indicated that an agreement on raising the US debt ceiling could be reached this week, thereby providing some relief to investors. At home, fourth quarter GDP figures on Friday could prove crucial for Sterling while some volatility pertaining to tomorrow’s policy decision in Japan cannot be ruled out.

Pound Sterling – UK Markets

The highlight for this week’s session is the UK GDP figures due for release in the final trading session of the week. The prospect of the British economy contracting for the fourth quarter remains elevated, as weak retail sales data on Friday highlighted the fragile state of the UK economy. In the midst of prevalent growth worries, Sterling hovered close to its recent lows against the greenback and the Euro today. Meanwhile, a shift in the BoE’s monetary policy stance seems on cards, as the MPC member, Ian McCafferty, suggested that the central bank must be willing to adopt unorthodox measures, if necessary. In this light, minutes of the BoE’s latest monetary policy meeting and the BoE Governor, Mervyn King’s comments will be scrutinised closely to gauge the prospect of a fresh round of QE. Although the UK economy continues to grapple with its woes, the housing sector remains fairly insulated, as data from RICS earlier today indicated that house prices are on track to surpass their pre-financial crisis peak. In the midst of continuing chatter about the UK losing its prized credit rating, this week’s public sector borrowing and employment figures will also be of relevance to investors.

US Dollar – US Markets

The US Dollar is trading almost flat against the majors this morning ahead of the outcome of the crucial monetary policy meeting in Japan early tomorrow. It remains to be seen whether the BoJ buckles down to the growing pressure from the political arena to alter its monetary policy stance. Meanwhile, in order to deal with the debt ceiling impasse, reports indicated that US Republicans are expected to present a bill this week to increase the debt limit by further three months. The recent tremors from the political arena visibly had its impact on the economy, as data released on Friday showed that consumer confidence in the US unexpectedly slipped to the lowest level in more than a year for January. A key set of US regional manufacturing and housing figures due for release during the course week is likely to have a bearing on the US Dollar. We expect the greenback to rely on external cues in today’s trading session for further direction, broadly due to the absence of any major economic data and on account of a public holiday in the US.

Euro – European Markets

Eight months before the national elections in Germany, signs of worry simmered for the ruling government, as the German Chancellor, Angela Merkel's ruling alliance was defeated in a closely fought contest in Lower Saxony, one of the country's most populous states. Although polls clearly project Angela Merkel holding a strong lead in national polls, today’s result does signal that the race until September 2013 is far from over. However, the reaction in currency markets was minimal, as the Euro held its ground against the greenback and Sterling today. Meanwhile, the Eurozone finance ministers are expected to meet later today, wherein markets expect policymakers to deliberate on measures for using the Eurozone rescue fund for bank bailouts. Although the ECB’s recent measures have played pivotal role in tackling the recent crisis, the Bundesbank Chief, Jens Weidmann, stated that it is "wrong and dangerous" to rely on the ECB as the only crisis manager. With no major economic data due today, key set of leading indicators across Europe slated for release during this week will hold market significance.

Other Currencies – Highlights

The Swiss Franc climbed against its major peers, as traders sought exposure in safe haven currencies in today’s session. Additionally, diminishing prospects of the SNB revising the euro-franc floor boosted the appeal for the Swiss Franc. However, economic indicators from Switzerland offered no major signs of an economic recovery, as data today showed that annual industrial production grew at a slower pace for the third quarter of 2012. Meanwhile, M3 money supply continued to grow for December. With no further domestic economic releases due today, traders are expected to closely monitor the outcome of the Eurozone finance ministers meeting. Besides monetary policy meeting in Japan tomorrow, other global cues will offer further direction to the Swiss Franc largely in absence of any major domestic data for the week.