Alarm Bells for UK

The British economy appears to be facing a renewed risk of falling into a recession, as data indicated that the UK economy contracted for the fourth quarter. It remains to be seen whether today’s weak economic growth data alters the currently practised fiscal and monetary policies in the UK. However, the US labour market continued to portray signs of strength, as the number of Americans seeking jobless benefits once again slipped to multi-year lows. With the labour market taking strides towards recovery, the expiry of the current monetary stimulus seems nearer. Across Europe, leading indicators continue to project a recovery in the region’s economy, with today’s data showing a rise in the German business climate index for January.

Pound Sterling – UK Markets

There seems to be no respite for the Pound against the Euro and the US Dollar in today’s trading session after the data indicated that the UK economy contracted by 0.3% sequentially for the fourth quarter of 2012, further highlighting the recent broader weakness in the economy. Moreover, a near term reversal of the current fiscal policy measures appears unlikely, as the Chancellor, George Osborne, rejected the IMF’s call for easing the current austerity stance. Besides, the impact of the weak GDP figures on the future course of the BoE’s monetary policy and UK’s credit rating also remains to be seen. On the macro front, data from the CBI released yesterday showed that retail sales volumes slowed in January but was largely better than market estimates. In the near term, market focus will shift to the next week’s manufacturing data for cues on whether the British economy managed to stage a recovery in the initial phase of 2013.

US Dollar – US Markets

The US Dollar nudged lower against the single currency in today’s session, as steadily easing worries about the Eurozone growth prospects prompted traders to seek exposure in the Euro. Meanwhile, the job market continued to tread along the path of recovery, as data released yesterday showed that the weekly jobless claims in the US fell to the lowest level in five years. The next week’s non-farm payrolls data will be watched closely to gauge if the pace of hiring quickened for January. However, regional districts continued to encounter weakness on the manufacturing front, with the Kansas region manufacturing activity unexpectedly contracting for January. Today’s new home sales data would be closely watched in order to gauge the recovery in the housing sector. Apart from the crucial non-farm payrolls reading, the Fed’s monetary policy meeting scheduled next week will hold significance for currency markets. Besides, fourth quarter GDP figures, durable goods orders and ISM manufacturing readings are other triggers from the US that are likely to attract market attention.

Euro – European Markets

The Euro continued to strengthen against its peers and after a long haul the single currency toppled the 1.34 mark against the US Dollar, as “risk on” sentiment among traders remained intact after data from Germany indicated that business sentiment climbed more than expected for January. The manufacturing PMI from Germany and the Eurozone also surprised market participants on the upside. With leading indicators from Germany showing steady signs of improvement, the recent economic weakness witnessed in the nation could to be a passing phenomenon. However, peripheral economies continued to offer a contrasting picture, as Spain’s unemployment rate soared to a record high yesterday and the nation’s Deputy Economy Minister conceded that the weakness in the labour market would linger on until the end of the year. With a light economic calendar today, markets would keep an eye on the ECB for details of the LTRO repayments undertaken by the region’s bank. Additionally, retail sales and confidence indices of the core Eurozone economies due next week would be closely watched.

Other Currencies – Highlights

The Japanese Yen declined against its peers in today’s session after data revealed that deflationary pressures in the Japanese economy prevailed for December. Against this backdrop, traders expect the BoJ to embrace more aggressive monetary stimulus measures to attain its targeted level of inflation. Moreover, the BoJ Governor, Masaaki Shirakawa, reaffirmed the central bank's commitment to pursue powerful monetary easing operations. As per the minutes of the BoJ’s last monetary policy meeting, policy makers deliberated on cutting the interest rate for the bank’s fixed-rate market operation and other loan schemes, further highlighting the dovish stance among monetary policy members in Japan. With a light macro calendar today, market focus is likely to shift to key global events lined up for the next week. The Fed’s monetary policy meeting and non-farm payrolls data will remain key trend setters for the near term. On the domestic front, manufacturing and labour market data scheduled next week will hold significance for currency markets.