UK Dipping Toe In Clearer Waters

Although the ECB’s monetary stance was in line with consensus estimates, comments from the ECB Chief that the central bank was technically ready to incorporate a negative deposit rate played spoilsport for the Euro, with the single currency paring initial gains. With the British economy dodging an unprecedented triple-dip recession, the underlying macroeconomic fundamentals continue to improve, as data showed that the UK’s dominant services activity continued to expand at a steady pace. Meanwhile, with the latest labour market data in the US offering mixed signals, today’s non-farm payrolls report is likely to offer a clearer picture about the pace of hiring in April following a lacklustre March.

Pound Sterling – UK Markets

The Pound nudged higher against the greenback in today’s session following a robust services PMI report. Data just released has revealed that the services sector grew more than expected for April, mirroring signs of steady recovery in construction and manufacturing activities recently. Meanwhile, Sterling garnered traction against the Euro yesterday after the ECB Chief hinted at a negative deposit rate. With a seemingly lacklustre day ahead in terms of UK macro data, a string of key economic releases next week will be closely watched for a clearer picture of the nation's economic recovery. The BoE policy meeting features on the economic calendar on Thursday, but is likely to be a low key affair as a sticky inflation outlook and steady improvement in economic prospects should prompt the BoE to adopt a wait and watch approach. Additionally, industrial production and trade balance data will garner market attention during the next week. In today’s trading session, markets are expected to ponder on the US non-farm payrolls data for further cues to risk appetite.

US Dollar – US Markets

The ECB Chief Mario Draghi’s comments of introducing negative interest rates in the Eurozone sent tremors down the market, leading the US Dollar to move higher against the single currency in yesterday’s trading session. Meanwhile, the US Dollar is trading range bound against the Euro today, as traders preferred to adopt a cautious approach ahead of the non-farm payrolls data later today. Yesterday’s data revealed that the number of people claiming jobless benefits unexpectedly slipped last week. With recent employment data confounding investors, the US non-farm report will be closely watched to unearth a clearer picture of the labour market, considering its influence on the Fed’s policy stance. Meanwhile, yesterday’s trade balance report indicated that US trade deficit narrowed sharply for March, underpinned by reduced appetite for imported goods. Apart from the jobs report, markets are also expected to keep an eye on ISM services figures scheduled later today, which are unlikely to provide any positive surprises for April.

Euro – European Markets

Although the ECB rate cut garnered a muted response from investors, the single currency sharply backtracked against the US Dollar and the Pound in yesterday’s trading session, as Mario Draghi’s comments on negative deposit rates soured market sentiment, sending market participants flocking to safe haven currencies. The ECB yesterday, in line with market estimates, lowered its key interest rate by 25 basis points to 0.5% to spearhead the fragile economy. With markets pondering over the efficacy of an interest rate cut the ECB Chief, in his post meeting press conference, indicated that the central bank stands ready to introduce negative interest rates to push banks to lend more rather than hold it at the ECB. The European Commission’s economic growth forecast due later today is likely to prove decisive for the Euro against the majors. With tough austerity measures proving a drag on peripheral Eurozone economies, it remains to be seen whether the Commission revises its forecast in the wake of subdued economic performance. Apart from the economic growth forecast, the US non-farm payrolls report is also expected to hold prominence in today’s session. Going forward, a string of services PMI across Europe and Eurozone retail sales data due next week will hold market focus for evaluating the region’s macro profile.

Other Currencies – Highlights

The Canadian Dollar is trading on a weaker footing against its US counterpart in today’s trading session ahead of the US non-farm payrolls data, which is likely to act as a catalyst for near term direction to currency markets. On the macro front, data released yesterday revealed that international merchandise trade balance in Canada surprisingly swung to a surplus for March, after eleven consecutive months of deficits, buoyed by a sharp rise in exports. In a significant development Stephen Poloz, the former head of Export Development Canada, has been appointed as the new Governor of the Bank of Canada, replacing Mark Carney, whose term ends on 1 June 2013. With the nation relying broadly on trade and business investment for growth, it will be interesting to watch what measures the new Governor will adopt to boost the economy. Going forward unemployment, housing starts and Ivey PMI data next week will be closely followed for decoding the state of the Canadian economy.