An eventful session lies ahead, after David Cameron promises a referendum to decide Britain’s membership of the EU if the Conservative Party win the next General Election. Meanwhile, employment figures continued to offer signs of the remarkable resilience shown by the U.K. labour market during 2012, despite the weakness seen in the broader economy. Additionally, minutes of the BoE’s last policy meeting showed no variation in the voting pattern.
More evidence of a recovery in Europe came to the fore following robust German investor confidence data and upbeat comments from the ECB President yesterday. The recent spate of positive news is expected to continue, as US policymakers are likely to vote on a short term extension of the debt limit later today.
Pound Sterling – UK Markets
The BoE minutes of the January 2013 meeting offered no major surprise, as MPC members offered no signs of switching their stance despite the economy showing signs of weakness. However, given the fragile state of economic affairs in the UK, a shift in monetary policy stance cannot be ruled out. Similar views were shared by the BoE Governor as he indicated that weaker economy would warrant more monetary stimulus.
Additionally, data just out has shown that the UK labour market remains resilient, with the claimant count posting a decline for December. Meanwhile, the UK Chancellor faces an uphill task of meeting his deficit reduction targets, as public sector net borrowing continued to increase for December, albeit lower than the previous month.
In today’s session, the focus invariably revolves around the UK Prime Minister’s speech, wherein he revealed plans for a national referendum by 2017 or 2018 on the nation’s future ties with the EU, if he is re-elected in the national elections in 2015.
US Dollar – US Markets
Although there was sporadic selling in the greenback in yesterday’s session, the US Dollar managed to hold its ground and is trading close to yesterday’s highs against the Euro and Sterling this morning. US leaders are expected to continue the can kicking exercise, as lawmakers are likely to vote on a proposal seeking the extension of the debt ceiling by nearly four months.
The manufacturing sector in the US appears to be facing fresh troubles, as the Richmond Fed revealed an unexpected contraction in its manufacturing activity for January, in line with the weakness seen in other districts. This is in sharp contrast to the Treasury Secretary’s recent comments that the US economy is nearing the final stages of recovery. On the housing front, data from the National Association of Realtors revealed an unexpected drop in existing home sales for December.
With a light domestic calendar today, developments from the Eurozone and manufacturing data from China early tomorrow are likely to determine the near term trend for the greenback.
Euro – European Markets
With recent developments offering signs of changing economic landscape in the Eurozone, the ECB President, Mario Draghi, affirmed this optimism by stating that “darkest clouds” over the Eurozone have subsided. He also added that the central bank would not deviate from its task of delivering stable prices. Additionally, greater than expected rise in the Eurozone and German economic sentiment indices further validates hopes of the Eurozone economy staging a recovery in 2013.
Spain successfully sold €7 billion worth of long term bonds in yesterday’s session, with the Economy Minister, Luis de Guindos, indicating that the bond sale generated record demand. The Eurozone consumer confidence data slated for release later today is expected to provide cues about morale among consumers in the midst of prevalent weakness in peripheral labour markets. Meanwhile, tomorrow’s manufacturing PMI figures will shed more light about the strength on the recent economic recovery.
Other Currencies – Highlights
The Aussie Dollar has weakened marginally against the US Dollar and the Japanese Yen in today’s trading session. Data released earlier today revealed a slower than expected rise in consumer prices for the fourth quarter of 2012, thereby tilting the scale in favour of an interest rate cut by the Reserve Bank of Australia going forward. However, market participants widely expect the Australian central bank to leave its benchmark interest rate unchanged at 3% in its monetary policy meeting scheduled early next month.
Among other economic releases, data from Westpac-Melbourne Institute revealed that the leading index climbed at a faster pace for November, signalling that economy would improve in the coming months.
With no major domestic data scheduled for release during the week, the Aussie Dollar is expected to closely track manufacturing data from China and the Eurozone for clarity on risk appetite among market participants.
British Pound Suffers Losses Ahead of Tuesday's Critical Vote