In the midst of the growing influence of political events in currency markets, the BoE and the ECB monetary policy meetings during the week may have a profound impact on the near term trend. In the aftermath of soft manufacturing and construction PMI readings from the UK, market participants will eye tomorrow’s services activity data to gauge the possibility of the BoE restarting its asset purchases in this week’s meeting.
Across Europe, the political brinkmanship in Italy continues to take its toll on financial markets, as the Sentix investor confidence index revealed a sharp deterioration for March. The Euro-area finance ministers’ meeting remains the key highlight today.
Pound Sterling – UK Markets
The evidence of MPC members inclining towards increasing the asset purchase target emerged from minutes of the latest BoE’s monetary policy meeting. The prospect of more policymakers rooting for this has received a further boost after data revealed that manufacturing and construction PMI in the UK contracted for February. Against this backdrop, it looks unlikely that Sterling will garner traction against the majors in today’s session.
Meanwhile, after last week’s crushing Eastleigh by-election defeat for the Conservatives, a few party members are likely to up their ante for ushering in a radical change of current economic strategy aimed at kick-starting the economy. Such demands could have a major influence on the UK budget scheduled later this month.
On the macro front, Lloyds business barometer declined to a four month low for February, as weak GDP figures and a changing global economic climate appear to have hurt business sentiment. The overnight BRC retail sales data and services PMI scheduled for release tomorrow are likely to set the direction for Sterling, until the BoE monetary policy meeting scheduled in the latter half of the week.
US Dollar – US Markets
The greenback has strengthened against the Euro this morning, as the recently triggered spending cuts and weak European economic data appear to have spooked traders. Growth concerns in the US and signs of political instability in European economies have prompted traders to flock towards the safe haven currency in recent sessions.
However, US economic indicators portray no alarming signals, as data revealed a better than expected rise in the Reuters/Michigan consumer sentiment index. Moreover, the ISM manufacturing index registered an unexpected jump for February, despite mixed regional manufacturing performance. However, personal income in the US recorded the largest drop in twenty years, largely hurt by the payroll tax hike.
With the latest FOMC minutes elevating hopes of an early withdrawal of the current monetary stimulus, the Fed Chairman Ben Bernanke held his ground as he opined that premature withdrawal of current policy measures could derail recovery. The non-farm payrolls data due for release in the final session of the week will have an influence on the Fed’s action plans, while the ISM non-manufacturing data and Fed’s Beige Book survey is also expected to garner some attention.
Euro – European Markets
The Euro slipped below the 1.30 mark against the US Dollar in Friday’s trading session, as the crisis in Italy has rattled markets worldwide on concerns that a prolonged political stalemate would not only hurt the Italian economy, but also reignite the debt crisis in the Eurozone.
On account of the immediate fallout of growing fears of a re-election in Italy, today’s data showed a substantial drop in the Eurozone’s Sentix investor confidence for March. The Eurozone unemployment rate climbed to record highs on account of the woes in the peripheral labour market, while easing consumer inflation figures appear to have offered more room to the ECB to lower its interest rate further. The GDP figures mid week and the ECB’s monetary policy meeting on Thursday remain key triggers for the common currency.
With the Euro trading close to the 1.30 mark against the US Dollar in today’s trading session, the European finance ministers’ meeting later today is likely to be in focus. Policymakers are likely to discuss the bailout for Cyprus and are also expected to deliberate over the recent economic forecasts issued by the European Commission.
Other Currencies – Highlights
The Japanese Yen has limited its downside risks against the majors in today’s trading session, largely supported by the recent bout of safe haven buying on account of prevalent global economic concerns.
However, traders continued to fret over the possibility of the BoJ adopting a more liberal approach following the leadership change later this month. The Japanese government's nominee to head the BoJ, Haruhiko Kuroda, argued that the central bank’s current policies are not powerful enough to boost inflation and therefore urged the BoJ to consider beginning its open-ended asset purchases early. In this context, the BoJ’s monetary policy meeting scheduled on Thursday will garner market attention.
With a light domestic economic calendar in today’s session, traders are likely to keep a close watch on the GDP and trade balance figures, scheduled for release in the latter half of the weekly session, for further insights into the state of the Japanese economy.
US Dollar Continues to Outperform European Rivals
Pound falls further
British Pound Suffers Losses Ahead of Tuesday's Critical Vote