US Stays on a Firm Footing

The US economy continued along the path to recovery, as data showed a considerable pick up in durable goods orders for the final phase of 2012, elevating hopes that tomorrow’s GDP figures will be fairly benign. However, the recent resilience shown by the US economy has increased the probability of the Fed’s ending its monetary stimulus much earlier than anticipated. Meanwhile, the UK continues to bear the brunt of the prevailing weakness in the economy, as a key official from Fitch indicated that Britain could lose its top credit rating. In contrast, the German recovery gathers momentum, as data showed a modest uptick in consumer morale for January.

Pound Sterling – UK Markets

The Pound is hovering close to yesterday’s lows against the greenback and the Euro amid prevailing concerns surrounding the UK economy. Britain’s top notch credit rating remains vulnerable to a downgrade, as a key member from Fitch highlighted that the UK economy faces a "significant" risk of losing its triple-A rating. The UK Treasury Committee of the House of Commons has indicated that they would ask the incoming Governor of the BoE, Mark Carney, at a hearing next month whether the current policy framework needs to be altered and whether the central bank should take up a decision to drop its current practice of targeting inflation. However, few of the MPC members remain opposed to such an idea, with BoE policy maker David Miles stating that he would opt for a flexible inflation objective instead of having growth targets. With another day of no major economic releases from the UK, cues from external markets will hold the key to determine the near term trend for Sterling. Additionally, mortgage approvals data due for release tomorrow would be closely watched for gauging the success of the lending scheme.

US Dollar – US Markets

The US Dollar is trading flat against the Euro today, as market participants stayed on the sidelines ahead of today’s FOMC meeting. Traders await for clues on the central bank’s stance on the current monetary stimulus. Moreover, Fitch indicated that the recent debt deal in the US has lowered chances of an immediate downgrade of the nation’s credit rating. Meanwhile, the US economy appears to have ended the fourth quarter on a strong footing, as data indicated that durable goods orders in the US rebounded strongly in the final month of 2012. However, it remains to be seen whether the ISM manufacturing data due later in the week echoes similar results. The Dallas Fed manufacturing index declined marginally but stayed well above market estimates for this month, while pending home sales unexpectedly slipped for December. The US consumer confidence data is likely to be a key trend setter for today’s session, while the build up to Fed’s monetary policy decision and fourth quarter GDP figures scheduled for release tomorrow will remain the key factors determining the near term trend for the greenback.

Euro – European Markets

The Euro has remained range bound against the US Dollar and the Pound in today’s trading session, as traders await cues from the other side of the Atlantic. In the midst of a prolonged recession in Spain and with the nation’s labour market consistently reeling under pressure, the EU budget enforcer, Olli Rehn, has signalled that Spain’s budget targets could be relaxed. The ECB President, Mario Draghi, has warned that failure to finalise an aid package for Cyprus could be detrimental for the Euro zone economy and could hurt the growing confidence over the region’s economy following the unveiling of the OMT plan. Despite the positive response to Ireland’s recent bond auction, the nation still appears to be reeling under the recent debt crisis, as Moody’s reiterated its ‘Negative’ outlook on the Irish banking system. However, GfK consumer confidence figures came as a breather as consumer sentiment in Germany climbed for February, reflecting the strength in the nation’s labour market. Meanwhile, external cues would be closely watched for further direction.

Other Currencies – Highlights

The New Zealand Dollar recovered sharply from yesterday’s lows, as upbeat trade balance data from the island nation boosted demand of the Kiwi Dollar. Data showed that New Zealand unexpectedly posted a merchandise trade surplus of NZ$486 million in December, largely supported by a stronger export figure. Meanwhile, the key highlight for the weekly session remains the Reserve Bank of New Zealand’s monetary policy decision slated later this week, wherein the central bank is expected to leave its benchmark interest rate untouched. Meanwhile, building permits data scheduled for release later today could have a bearing on the currency markets. Apart from domestic cues, the Kiwi Dollar is also expected to track developments from the US during the course of the week in order to gauge the risk appetite among market participants.