Traders seem to have scaled down their safe haven bets, as an early withdrawal of the Fed’s current monetary stimulus appears a distant reality after data revealed an unexpected contraction in US GDP for the fourth quarter. The Fed once again reiterated its stance that the current bout of asset purchases would end only when the labour market shows substantial improvement and warned that economic activity has paused in recent months.
However, some positive signals emerged from the UK economy, as a survey from GfK revealed an unexpected improvement in consumer confidence and a rise in Nationwide house prices. Meanwhile, macro data from Germany has been mixed today.
Pound Sterling – UK Markets
The Pound has steadily climbed against the US Dollar and is trading above the 1.58 mark this morning after dismal GDP data from the US stoked speculation that the Fed might continue with its bond-buying plan for a longer period.
The Gfk survey offered some respite for the UK economy, as data today indicated that consumer confidence improved for January. signs of easing credit conditions continued to have a positive influence on the housing market, as data from Nationwide revealed that house prices climbed more than expected for January. This comes on the back of yesterday’s upbeat mortgage approvals data for December. Meanwhile, the BoE policy maker Martin Weale, cast aspersions over the idea of adopting a nominal GDP target, in line with other influential policy makers in the UK.
Once again external market cues are likely to determine the short term term trend for Sterling as no major domestic economic releases are expected today. Additionally, traders are likely to keep an eye on tomorrow’s PMI to gauge the strength of the UK manufacturing sector.
US Dollar – US Markets
Yesterday’s weak GDP data from the US sent a strong signal that all is not well in the US economy. The US economy unexpectedly contracted in the fourth quarter, marking the weakest performance since the recession in 2009, largely hurt by slower inventory growth and a steep cut in defence spending. The statements following the Fed’s two day monetary policy meeting also echoed similar pessimism, as the central bank indicated that the economic activity has “paused” in recent months. Against this backdrop, a change in the Fed’s current monetary policy stance appears a distant reality.
The US Dollar continued to trade close to yesterday’s lows against the Euro and Sterling, as the possibility of an early withdrawal of the current monetary stimulus in the US remains bleak. However, ADP figures showed that hiring for January garnered pace, reflecting the positive trend in recent jobless claims figures.
Today’s jobless claims figures and personal consumption data are likely to feature among the key highlights for today’s session. Additionally, the build up to tomorrow’s non-farm payrolls report is also expected to have a bearing on market sentiment.
Euro – European Markets
The Euro continued to garner momentum against the greenback and hovered well above the 1.35 mark in yesterday’s session, as hopes of an early withdrawal of the Fed’s monetary stimulus was dented following dismal GDP figures for the fourth quarter. However, the single currency failed to capitalise on yesterday’s gains in today’s session and is trading flat against the US Dollar amid mixed signals from Germany.
Data released earlier today revealed a sharp decline in German retail sales for the crucial Christmas period, highlighting the fragile state of the German economy for the fourth quarter. However, the number of unemployed unexpectedly declined for January. Meanwhile, investors appeared unperturbed by the uncertainty surrounding Italian elections scheduled next month, as yesterday’s Italian bond auction continued to witness a drop in borrowing costs.
German CPI figures slated for release later today is likely to have a muted impact, given the dwindling hopes of an interest rate cut by the ECB. However, economic data from the US slated for release during the next few trading session is likely to have a bearing on the Euro.
Other Currencies – Highlights
The Kiwi Dollar advanced against its peers in today’s session after the Reserve Bank of New Zealand, in its monetary policy meeting, held the official cash rate unchanged at 2.5%, in line with market estimates. However, the central bank indicated that the domestic currency is overvalued, reflecting the central bank’s decision to lower its holdings of New Zealand Dollars in recent months.
The RBNZ Governor, Graeme Wheeler, indicated that the New Zealand economy would recover in 2013 along with a recovery in global growth. However, he also added that the labour market remains weak and fiscal consolidation continues to hurt growth.
With no major domestic data scheduled for the week, trends in the Kiwi Dollar will widely depend upon risk appetite among market participants, given the flurry of key economic releases from the US in the near term.
Dollar Weakens as Fed Turns Dovish, Eyes on BoE
Euro Plummets as Draghi Opens Door For Rate Cuts
British Pound Stays Under Pressure Ahead of Tuesday's Vote