Sterling Crawls Out of The Abyss

Sterling witnessed a relief rally in yesterday’s session, largely supported by short covering from traders and on reports that Qatar will invest heavily in UK infrastructure projects. Additionally, the BoE Governor provided a slightly more upbeat assessment of the British economy, with his expectation that growth would recover in the latter half of this year. Evidence is mounting that the governments austerity measures are impeding growth in the UK, and the Chancellor’s stance in the annual budget due next week will have major ramifications on Britain’s growth prospects. A raft of US economic releases scheduled later today will have a bearing on the Fed’s stance in next week’s monetary policy meeting, whilst Eurozone policy makers will continue to attract attention, given their prolonged efforts to formulate an aid package for Cyprus.

Pound Sterling – UK Markets

The Pound has continued to gain against the greenback and the Euro in today’s trading session, as traders seemingly reversed their short positions in Sterling. Additionally, reports suggesting that Qatar would invest heavily in domestic infrastructure projects further supported Sterling. Following the Pounds' recent weakness, the BoE Governor, Mervyn King, has stated that Sterling is appropriately valued and that the UK economic recovery would gradually gather pace during the course of the year. Traders are likely to be on their toes next week as they await a barrage of key events in the UK. Despite Britain reeling under the loss of its “AAA” rating and being on the cusp of a triple dip recession, traders continue to fear the possibility of the Chancellor sticking to his austerity stance in next week’s budget. Moreover, minutes of the BoE’s latest monetary policy meeting will be closely watched in order to gauge if there has been a change in the voting pattern among MPC members. Additionally, consumer price inflation, employment and public finances data also feature on the economic calendar next week.

US Dollar – US Markets

Investors’ preference to take profit in the greenback following its recent gains led the US Dollar to take a breather against the majors in yesterday’s trading session. In the latest positive sign for the US labour market, data released yesterday indicated that initial jobless claims fell for a third consecutive week. With calls to roll back the stimulus programme getting louder after buoyant labour market data, the FOMC meeting due next week is likely to become even more relevant. In today’s trading session, investors have their plate full in terms of economic releases in the US. With producer prices ticking up in February, today’s update on consumer inflation will be keenly watched for further insights into inflationary pressures, considering its influence on the monetary policy. Additionally, industrial production due later today is expected to be the latest string of data painting a brighter picture for the world’s largest economy, following the recent upbeat retail sales and housing data. Moreover, the consumer confidence report due today is not likely to be bogged down by the recent fallout on fiscal issues. We believe that if today’s economic data surprises on the upside, it is likely to strengthen market speculation of a premature partial withdrawal of monetary stimulus, giving the US Dollar bulls a reason to get excited.

Euro – European Markets

The single currency managed to breach the 1.30 mark against the greenback in yesterday’s trading session, underpinned by robust demand from the Spanish special bond auction and profit taking on the US Dollar. Spain made the most of the prevalent conditions in bond markets, as the nation witnessed borrowing costs decline, thereby signalling that investors remain confident of the nation’s recovery. Additionally, the ECB, in its monthly report, revealed that the Euro zone would gradually recover during the course of the year. In today’s trading session, the common currency is looking for direction against the US Dollar, as traders tread cautiously ahead of the special Euro area finance ministers meeting in Brussels later today to discuss financial aid for Cyprus. Additionally, today’s European session will also be dominated by the first meeting of Italian politicians after the recent inconclusive elections. Market participants are also expected to keep an eye on Euro zone consumer inflation data due during this session, to see if the reading supports the case for further easing by the ECB in the near term.

Other Currencies – Highlights

The Japanese Yen has weakened against high yield currencies in today’s trading session after the upper house gave a nod to the appointment of Haruhiko Kuroda as Governor and Kikuo Iwata and Hiroshi Nakaso as his deputies, following the approval by the lower house on Thursday. This shuffle in the Bank of Japan has paved way for aggressive monetary easing going forward, in an effort to bring the world's third-largest economy out of its long bout of deflation. With the Japanese Prime Minister’s nominees being appointed to head the central bank, the deployment of open end purchases sooner than expected remains very much in the realm of possibility. This is likely to put further downward pressure on the Japanese Yen in the near term. Meanwhile, with a light domestic economic calendar today, external market cues would hold significant for the Japanese Yen against the majors.