Will the UK lose an ‘A’?

Global central banks appear to be in no mood to halt the recent liquidity rush, as the BoJ bowed to political pressure by embracing a 2% inflation target and induced an open ended monetary stimulus program. Although high yield currencies were in demand in the early session today, the sentiment has waned lately. In the UK, public sector net borrowing climbed for December, further denting the prospect of the UK maintaining its coveted “AAA” credit rating. The German sentiment indices and the ECB President’s speech due later today are likely to be scrutinised closely and have the potential to influence market sentiment in today’s trading session.

Pound Sterling – UK Markets

The Pound has erased its early session gains and is trading flat against the greenback. In the early part of today’s session, the Pound had moved higher against the US Dollar, largely influenced by the “risk on” sentiment among market participants following the BoJ’s decision to induce a larger monetary stimulus. Meanwhile, concerns over the UK losing its prized top notch credit rating continue to linger, as latest data showed that Britain’s public sector net borrowing climbed for December, albeit at a slower pace. Meanwhile the BoE, in its latest lending survey, indicated that mortgage rates on home purchases have dropped in recent months, as the Funding for Lending scheme continued to play a pivotal role in lowering borrowing costs. In today’s session, the industrial trends survey from the CBI scheduled for release later today will be closely watched for insights into the UK’s manufacturing sector. Minutes of the BoE’s monetary policy meeting and employment figures due for release tomorrow, are likely to remain the near term trend setters for Sterling.

US Dollar – US Markets

The US Dollar is trading almost unchanged against the majors this morning. The greenback had lost ground against high yield currencies in early trading, following the BoJ’s announcement to adopt a 2% inflation target and commitment to pursue an open ended monetary stimulus program from January 2014. With the US President Barack Obama officially beginning his second and final term, the focus now shifts to developments on the fiscal front, as Republican leaders in the House of Representatives have scheduled a vote tomorrow on a motion seeking the extension of the US debt ceiling by nearly four months. With industrial production in the US showing signs of slowing and some regional manufacturing indicators contracting for the initial phase of 2013, today’s manufacturing data from the central bank of Chicago and Richmond region are expected to shed more light on recent trends in the manufacturing sector. Additionally, existing home sales figures will offer further direction regarding the housing sector.

Euro – European Markets

The Euro held its 1.33 mark against the greenback in the early part of today’s session, after the BoJ doubled its inflation target and announced a switch to an open ended asset purchases scheme from next year. However, it has since dropped lower against the US Dollar amid rumours that Jens Weidmann, the President of Bundesbank, has resigned. Meanwhile, the Dutch finance minister, Jeroen Dijsselbloem, has replaced Luxembourg’s Jean-Claude Juncker as the head of Euro group finance ministers. The Dutch finance minister is expected to continue with confidence boosting measures to restore trust in the Euro-area and also address issues related to a bailout for Cyprus and elevated levels of unemployment in peripheral economies. The Bundesbank has warned of a potential currency war, if nations put pressure on central banks to pursue aggressive monetary policies. The German economic sentiment index due for release later today is expected to offer some light on the state of the German economy in 2013. Additionally, the ECB President, Mario Draghi’s speech later today will be scrutinised, given its wider implications on the monetary policy stance that the ECB plans to follow during the year.

Other Currencies – Highlights

The BoJ succumbed to relentless pressure from the ruling government by pursuing aggressive monetary easing by resorting to open ended purchases beginning January 2014 and doubling its inflation target to 2%. However, the Japanese Yen advanced against its major peers in today’s trading session, as the central bank refrained from adding more monetary stimulus for the current year. Meanwhile, the central bank raised its growth forecast for the current fiscal year to 2.3% from a previous projection of a 1.6% growth. In today’s trading session, news flows emanating from Europe and the US are likely to have a bearing on currency markets. Going forward, consumer inflation figures and merchandise trade balance data slated for release later in the week are expected to give further insights into the state of the Japanese economy.