UK Remains on the Brink

The dismal economic situation in the UK shows no sign of a turnaround, as data just in has revealed that industrial activity in the UK remains in the doldrums for January. However, the UK trade deficit unexpectedly narrowed for January with both imports and exports registering a drop. With the annual budget drawing closer, it remains to be seen whether the underlying economic conditions would prompt the Chancellor to make changes to the current austerity plan. With little on offer from the US in today’s trading session, market participants turn their attention towards Italian and Spanish bond auctions due later today to gauge the risk appetite for peripheral bonds.

Pound Sterling – UK Markets

Sterling has lost steam against both the US Dollar and the Euro in today’s trading session after a set of weak economic releases. The recovery in Britain’s manufacturing activity remains evasive, as data continued to show an drop in the annual UK industrial production for January. Nevertheless, data showed that the trade deficit narrowed for January. In this context, the NIESR GDP estimate due later today would hog the limelight, as traders would look for cues to gauge whether the economy would avoid an unprecedented triple dip recession. A subdued reading is likely to put further downward pressure on the Pound in the near term. Meanwhile, data from RICS released earlier today indicated an unexpected drop in the British house price balance for February. To make matters worse, the OECD leading indicator pointed towards slowing momentum in the British economy. With little on the economic calendar during this week, Sterling is likely to take direction from developments in the US and Europe. Traders are also likely to turn their attention towards the upcoming annual budget in the UK wherein the Chancellor’s stance holds the key for determining the economic prospects of the nation.

US Dollar – US Markets

The US Dollar has nudged higher against the single currency in today’s trading session as lack of decisive economic data across Europe and US prompted traders to adopt a cautious approach. Additionally, subdued UK economic releases have helped the greenback to gain traction against the Pound this morning. Meanwhile, with the recent ISM data in the US surprising on the upside, markets are expected to ponder on the NIFB small business optimism index due later today to gauge whether small firms too have been to able to take advantage of the modest growth witnessed in the broader economy. In the backdrop of the recent strong labour market report, the headline figure is expected to continue with its upward trend for a third consecutive month. With not much on the US economic calendar today, tomorrow’s retail sales figure is expected to act as a catalyst for the US Dollar in the near term. With the US consumer confidence remaining undeterred by the recent fiscal policy changes, retail sales is expected to record a rise for the second consecutive month, thereby adding to evidence that the US economy is treading on its path to recovery.

Euro – European Markets

The common currency has lost ground against the US Dollar in today’s trading session as traders remain on the sidelines ahead of Spanish and Italian bond auctions due later today. With both nations experiencing uncertainty in the political arena and amid Italy’s rating downgrade by Fitch, it would be interesting to see whether these nations are able to clear the bond auction hurdle with ease. Meanwhile, data released earlier today revealed that French current account deficit widened for January, raising speculation that Eurozone’s second largest economy is facing difficulties to counter headwinds in the region. In a noteworthy development, Fitch has affirmed Denmark's credit rating at “AAA” with a “Stable” outlook, citing stability in the broader macro economy and the nation’s commitment to observe fiscal discipline. Meanwhile, the final German CPI data released earlier today indicated that inflationary pressures remain well anchored, thereby providing the ECB considerable leeway to continue with its current monetary policy stance.

Other Currencies – Highlights

The Japanese Yen declined against the majors in the early morning session today amid renewed speculation that monetary stimulus in Japan might be bolder and probably come sooner than expected. The minutes of the BoJ’s latest monetary policy meeting revealed that few policy makers opined that buying longer dated Japanese Government Bonds (JGBs) remains a viable policy option, if additional easing is needed in the future. Moreover, Kikuo Iwata, the BoJ Deputy Governor nominee, also voiced support to buy JGBs to achieve inflation target. However, the Japanese Yen has recovered most of its losses later in the session and is trading almost flat against the majors this morning. On the domestic front, data released earlier today offered mixed signals, as data indicated that consumer confidence and sentiment among large manufacturers ticked higher while tertiary industry activity registered a sharp decline for January. With no major economic releases in store for today, traders are expected to monitor developments from overseas markets to decipher the near term trend in currency markets.