Sterling Staring down the Barrel Tomorrow

Early optimism following the extension of the US debt ceiling and strong Chinese manufacturing data is supported by robust German and Eurozone manufacturing PMI readings released this morning. However, with Europe not out of the woods yet, the IMF has lowered its 2013 global growth projection, in tune with the World Bank’s earlier forecast. In the UK, today’s BBA figures showed that appetite for mortgage loans remains intact. However, the economy appears to be grappling with problems, prompting the IMF to lower its growth forecast for the UK. The focus will now remain on tomorrow’s GDP figures, given its wider implication on the future course of Britain’s fiscal and monetary policy stance.

Pound Sterling – UK Markets

The Pound is trading close to yesterday’s lows against the greenback this morning after the IMF cut its 2013 growth forecast for the UK, thereby validating concerns surrounding the nation’s economic recovery. The minutes of the BoE’s latest meeting also saw policymakers casting aspersions over the economic recovery in the UK, largely hurt by the continuing set of austerity measures. However, today’s mortgage approvals from the BBA has shown a marginal improvement for December, further highlighting the influence of the central bank’s lending scheme for the housing sector. Yesterday’s jobs data had also offered some respite to market participants. With recent retail sales data offering no reasons to cheer, today’s retail sales survey from the CBI is likely to offer insights into whether the trend has changed for January. Meanwhile, along expected lines, the UK Prime Minister expressed his commitment to holding a referendum before 2018 in order to determine the nation’s ties with the EU. In the midst of persistent worries over the UK economy, traders brace for weak fourth quarter GDP figures scheduled for release tomorrow.

US Dollar – US Markets

The US House of Representatives has passed legislation to temporarily extend the debt ceiling to 19 May 2013, setting the stage for US leaders to discuss measures dealing with spending cuts in order to tackle the nation’s fiscal situation. Although the move has prevented the possibility of an immediate confrontation among policymakers, a stalemate on reaching a consensus over key matters related to spending cuts could once again shift the focus back to the US political arena in the next few months. The US Dollar is trading flat against the single currency in today’s session, as traders preferred to adopt a cautious approach following no clear signs on the global economic front. With last week’s jobless claims data showing an unexpected improvement in the labour market, it remains to be seen whether the trend has continued, given the influence of labour market data on the Fed’s monetary policy stance. Manufacturing data from the Kansas region will also be monitored closely, given the dismal set of data from the US for January.

Euro – European Markets

Upbeat Chinese manufacturing data propelled initial optimism, enabling the single currency to trade above the 1.33 mark against the US Dollar this morning. The single currency has managed to hold its ground against the majors, largely supported by positive PMI data from the Eurozone and Germany. However, manufacturing and services sectors in France contracted at a sharper than expected pace for January, reflecting concerns raised by credit rating agencies in the recent past. Meanwhile, the IMF expects the recession in the Eurozone to continue for 2013, largely hurt by the prevalent weakness in peripheral economies. Data earlier today revealed that Spain’s unemployment continued to hover at historical highs. Meanwhile, after the successful completion of a bond auction in Ireland earlier this month, Portugal also appears to be getting its house in order, as the country managed to raise €2.5 billion through a short term bond auction in yesterday’s trading session. The focus in the Eurozone now shifts to tomorrow’s IFO sentiment indices in Germany, which are likely to show an improvement for January.

Other Currencies – Highlights

The Canadian Dollar declined against its major peers in yesterday’s trading session after the Bank of Canada, in its monetary policy statement, indicated that the need to raise its interest rate in the future is now less imminent. Additionally, the central bank lowered its 2013 economic growth forecast to 2%, compared to its previous forecast of a 2.3% growth. The latest downward revision was still better than the IMF’s projection of a 1.8% growth for the current year. Meanwhile, the Loonie has recovered some of yesterday’s session losses and is trading flat against the US Dollar, largely supported by upbeat manufacturing data from China and Germany. On the macro front, consumer price inflation data scheduled for release tomorrow is likely to be keenly eyed. The figure is expected to remain benign, as the central bank expects inflation to remain below the target rate of 2% until the second half of 2014.