US Jobs Report Alters Dynamics

In the midst of speculation that the Fed may scale back some of its monetary stimulus, the upbeat labour market report released on Friday has heightened the possibility of such a move at the next monetary policy meeting. With the unemployment rate falling to multi year lows, the US economy currently looks well equipped to absorb shocks emanating from the recently expired fiscal stimulus. With Fitch lowering Italy’s credit rating, markets will keenly eye the Eurozone policymakers meeting scheduled this week for hints on likely measures to arrest the region’s debt crisis. Meanwhile, with a relatively calm session ahead today, tomorrow’s manufacturing and trade data in the UK could decide near term dynamics for Sterling.

Pound Sterling – UK Markets

The Pound is trading almost flat against the US Dollar and the Euro this morning as traders brace for a relatively quiet trading session ahead. The quarterly consumer inflation expectation survey from the BoE, published on Friday, made it loud and clear that inflation is expected to tick higher for the year ahead. This probably barred MPC members from immediately restarting the bond buying programme at their monetary policy meeting last week. However, the employment situation in the UK remains stable as the Lloyds employment confidence index nudged higher for February. Meanwhile, with recent manufacturing PMI on a softer side, industrial production data for January due tomorrow is likely to echo a slowdown in manufacturing activity in the UK. Additionally, the NIESR GDP forecast will be closely watched to gauge whether the UK economy could escape a triple-dip recession. Trade balance data scheduled for tomorrow also remains a key event on trader’s radar, in order to ascertain the impact of the recent weakness in Sterling.

US Dollar – US Markets

The US Dollar strengthened against the majors in Friday’s trading session, after a buoyant set of employment numbers fuelled optimism that the world’s largest economy might be capable of overcoming the negative effect of higher taxes and steep spending cuts by the government. Data indicated that the jobless rate fell to a four year low of 7.7% for February, adding to evidence that the US Fed’s ultra loose monetary stimulus is aiding recovery. Against this backdrop, consumer price inflation data, due later this week, will be closely followed to check whether the central bank can continue with its monetary stimulus. Additionally, Italy’s rating downgrade on Friday also helped the US Dollar to register gains against the Euro. In today’s trading session, the greenback is looking for direction against the majors amid a lack of a trigger for risk appetite. With no major economic releases today, markets are expected to keep an eye on the US monthly budget statement due tomorrow. Additionally, a raft of economic releases due later in the week is expected to sway market sentiment.

Euro – European Markets

Upbeat sets of labour data fuelled speculation that the US Fed would roll back its stimulus sooner than anticipated, driving the common currency lower against the US Dollar on Friday. Moreover, in another blow for the crisis laden zone, Fitch lowered its credit rating on Italy to “BBB+” from “A-” and warned that the continued political gridlock might threaten the nation’s ability to deal with recession and European debt crisis. However, after slipping below the 1.30 mark against the US Dollar on Friday, the single currency has managed to hold its ground in today’s trading session. Meanwhile, industrial production in France slipped for a second consecutive month for January. However, Germany continues to remain a bright spot in the ailing Eurozone economy, as data released earlier today revealed that trade surplus widened for January on the back of strong exports. In the absence of major European economic data, we expect the Euro to trade in a tight range against the majors in today’s trading session. Meanwhile, the EU leaders’ meeting due later in the week, to discuss financial aid packages for Cyprus, holds significance.

Other Currencies – Highlights

The Australian Dollar has failed to register gains against the greenback in today’s trading session as a mostly weak set of economic data from China over the weekend dented market sentiment. China’s consumer price inflation rose more than expected for February, fuelling speculation that the People's Bank of China might be compelled to tighten its monetary policy stance during the course of the year in order to control inflationary pressures. Moreover, data revealed that Chinese industrial production and retail sales growth unexpectedly slowed for the first two months of 2013. Going forward, a raft of critical economic data in Australia is likely to be key for the Aussie Dollar in the near term. Business and consumer confidence indicators, employment and home loan data due later this week will be closely watched to gauge the overall performance of the Australian economy. Additionally, news flow emanating from overseas markets is also likely to have a bearing on the currency.