Calm before the Storm

Despite underlying fears surrounding the Eurozone’s economic situation, appetite for riskier assets remained healthy as major global equity indices toppled fresh multi year highs. Traders continued to find solace in improving prospects for the US economy, as data yesterday showed that services activity expanded at a faster pace for February. Further cues on this front are awaited, as today’s ADP employment data is likely to set the stage for the all important labour market report scheduled for release on Friday. Tomorrow’s monetary policy meetings in the UK and the Eurozone will remain key determinants to the trend in currency markets, while Eurozone GDP data and the Fed’s Beige Book survey are major events on tap for today.

Pound Sterling – UK Markets

A remarkable improvement in services PMI in the UK helped the Pound to nudge higher against the US Dollar and the Euro in yesterday’s trading session. In sharp contrast to the manufacturing and construction data released recently, the dominant services activity in the British economy unexpectedly accelerated at its fastest pace in five months, thereby diminishing chances of the British economy slipping into a triple dip recession. Meanwhile, with few members favouring alternative tools to revive the faltering economy, the prospect of the BoE restarting its asset purchases remains a close call. However, inflationary pressures show no signs of abating, as today’s data from BRC indicated that annual shop price inflation almost doubled for February. With no domestic releases in store today, the Pound is likely to be influenced by economic releases from the US later and the all important monetary policy decisions in Europe scheduled for tomorrow.

US Dollar – US Markets

The US Dollar failed to garner traction against the single currency in today’s trading session, as an unexpected surge in services PMI prompted traders to shun the safe haven currency. ISM data revealed that services activity in the US appeared to be expanding, buoyed by a rise in new orders and a boost in export demand. Meanwhile, Fed policymakers continue to voice their concerns over the central bank’s monetary stance as hawkish Richmond Fed President, Jeffrey Lacker, warned that the massive size of the balance sheet would likely make it difficult for the Fed to exit from its ultra loose monetary policy at a later date. In this context, markets today are expected to keep a close watch on ADP employment data ahead of the crucial non-farm payrolls data due tomorrow, to gauge improvement in the labour market. With last week’s dire durable goods data, today’s factory orders are likely to reconfirm a retreat for January. However, with the services and manufacturing sectors gaining momentum for February, today’s US Fed’s Beige book survey should be closely followed for an overall picture of US economic growth.

Euro – European Markets

The single currency is trading marginally higher against the US Dollar in today’s trading session, underpinned by improved risk appetite after the US ISM data revealed an unexpected surge in service activity. Additionally, in an unexpected fillip to the Eurozone, retail sales in the economy bounced back more than expected for January. However, ongoing uncertainty in Italy in respect to the elections saw the single currency retrace most of its gains. Moreover, in spite of upward revisions, yesterday’s final services PMI indicated that apart from Germany, all Euro-area nations continue to remain in contraction territory, thereby pointing toward a growing divergence between the relatively healthy German economy and the rest of Europe. Meanwhile, the EU commission indicated that although the Spanish economy is on its track to recovery, the government needs to push for more reforms as backsliding could likely have a bearing on the financial sector. Today’s second estimate of Eurozone fourth quarter GDP is likely to remain unrevised, marred by fiscal austerity measures. Additionally, markets await the outcome of tomorrow’s ECB policy meeting.

Other Currencies – Highlights

The Canadian Dollar is trading flat against the US Dollar ahead of the Bank of Canada’s interest rate decision later today, wherein the central bank is likely to leave its benchmark interest rate unchanged. Meanwhile, traders are likely to maintain their focus on the BoC monetary policy statement in order to gauge if the prospect of an interest rate hike remains under consideration. Additionally, today’s Ivey PMI will be closely eyed for insights into the overall health of the Canadian economy. The Canadian employment data and housing data due later in the week is expected to garner market attention. Additionally, a slew of economic releases from the US will likely hold the key for determining the near term trend in the Canadian Dollar.