Doomy Gloomy Sterling

In the aftermath of a weak set of industrial production data from the UK yesterday, the NIESR projected that the nation’s GDP shrank for three months to February 2013, further aggravating fears of the UK economy slipping into a triple-dip recession. It remains to be seen how UK policymakers will respond to these concerns. Yesterday’s short term bill auction in the Eurozone drew mixed responses as Spanish yields dropped, while Italy had to bear higher borrowing costs and seemingly hurt by the recent credit rating downgrade. Today’s long-term debt sale in Italy is likely to offer more clarity on this front. Additionally, Eurozone industrial production and US retail sales figures later today will be subject to scrutiny.

Pound Sterling – UK Markets

The Pound backtracked against the majors in yesterday’s early trading session and slipped below the 1.49 mark against the US Dollar as the threat of a triple-dip recession loomed following weak industrial production figures. With the manufacturing sector proving to be a major drag on growth in the first quarter of this year, the NIESR estimated that the UK economy contracted 0.1% in three months to February 2013. This has spurred speculation that the BoE might induce additional monetary easing sooner than expected. However, despite the prevalent gloom surrounding the UK economy, the Pound witnessed some strength in the latter half of the session yesterday, amid signs of fresh buying from multi year lows. An unexpected narrowing of UK trade deficit for January provided some respite for traders. In the backdrop of disappointing economic data, the UK Chancellor is likely to remain under pressure to present growth inducing measures to revive the economy in his annual budget next week. However, with his hands tied on the fiscal side, the onus will shift to the BoE to bring about radical policy changes.

US Dollar – US Markets

In the absence of major economic data, the US Dollar was once again influenced by external developments yesterday. The greenback is trading close to its recent highs against the single currency in today’s trading session, as traders maintained a cautious approach amid higher borrowing costs at Italian bill auctions held yesterday and downbeat comments by ECB council member, Jens Weidmann. On the domestic macro front, yesterday’s NFIB small business optimism index ticked higher for February amid evident signs of an improving economic outlook in the US. With consumer confidence and the labour market registering a substantial improvement over the previous month, today’s retail sales report is likely to echo similar results, thereby adding to the encouraging trend delivered by the US macro-economic data in the recent past. Additionally, the US monthly budget statement due later today is also expected to remain a key event on traders’ radar, given the continuing fiscal conflict among policymakers in the political arena. However, next month’s budget will likely hold more prominence, as it will reflect the automatic spending cuts that became effective from the current month.

Euro – European Markets

The common currency has lost ground against the Pound and is trading in a tight range against the US Dollar this morning. However, mixed results at bond auctions held yesterday have kept investors on their toes ahead of the long term debt sale in Italy later today. Spain managed to garner decent demand for yesterday’s bill auctions, prompting the nation to sell three longer-dated bonds at a special auction tomorrow to make the most of a reasonably stable market appetite for Spanish bonds. However, Italy witnessed a rise in borrowing costs largely affected by the ongoing political unrest. In this context, markets should closely scrutinise today’s Italian bond auctions, especially after the recent axing of the nation’s credit rating by Fitch. Meanwhile, the ECB council member, Jens Weidmann, has indicated that though inflationary pressures remain well anchored, the crisis in the Euro-area is far from over due to ongoing concerns in peripheral economies, political instability in Italy and consistent fiscal worries in France. Moreover, in the backdrop of dire industrial output data from Germany and France, industrial production from the Eurozone due later today is likely to be on the softer side also.

Other Currencies – Highlights

The New Zealand Dollar has declined marginally against the US Dollar in today’s trading session ahead of the Reserve Bank of New Zealand’s interest rate decision due later today. The central bank is expected to leave the benchmark interest rate unaltered at 2.5%. The accompanying monetary policy statement will be closely analysed for signs of any change to the central bank’s stance, on account of the prevailing severe drought condition in the nation. Moreover, the performance of the manufacturing index due tomorrow will be keenly watched for further insights into the heath of New Zealand’s economy. Meanwhile, a report out earlier today has revealed that food prices in New Zealand declined for February, thereby hinting that inflationary pressures remain muted. Apart from the monetary policy decision later today, cues emanating from the overseas market could likely play a pivotal role in determining the trend in the Kiwi Dollar against the majors.