Europe Holds the Key

“Risk off” sentiment remained the theme in yesterday’s trading session as buoyant US retail sales figures heightened speculation that the Fed might start tapering its bond buying programme sooner than anticipated. In today’s session, the German ZEW survey has the potential to lift markets, as it is poised to indicate a marked improvement in economic sentiment in the Euro region’s largest economy. Meanwhile, in a noteworthy development, the European Stability Mechanism awarded aid tranches to Cyprus and Greece yesterday under their respective bailout agreements. In the UK, Sterling will take direction from overseas cues due to lack of any domestic triggers in today’s trading session.

Pound Sterling – UK Markets

Robust US retail sales yesterday has added to signs that the US economy is gathering momentum and led the Pound to nudge lower against the US Dollar. On the domestic front, the RICS report signaled a marked pickup in housing activity as data revealed that the house price balance in the UK rose to its highest level in almost three years, bolstered by the extension of the BoE’s FLS scheme. With an apparently lacklustre day ahead and Sterling trading in a tight range this morning, the Conference Board’s leading economic index for May will be the only data on radar today. However, the UK employment and quarterly inflation report due tomorrow will remain key trend setters for Sterling in the near term. With the recent macro picture offering evidence that the UK economy is bottoming out, the parting BoE Governor, Mervyn King, is likely to upwardly revise his growth forecasts in the report tomorrow.

Pound Sterling – UK Markets

Upbeat retail sales data increased the appeal of the US Dollar against the majors in yesterday’s session, as data undermined the US Fed's decision to extend its bond purchases. Retail sales in the US unexpectedly rose last month, underpinned by a rise in demand for household items, thereby easing fears that higher taxes were tightening household budgets and weighing on the broader economic growth. Owing to the recent string of encouraging macro data from the US, the central bank looks well poised to shift gears in the near future. Although the greenback has pared some of its gains and is trading marginally lower against the single currency in today’s trading session, high volatility in the Dollar cannot be ruled out owing to a raft of major economic data in Europe scheduled later today. With the broader US economy treading the path to recovery, the NFIB small business optimism data, scheduled for release later today, will shed light over the revival of small businesses in the economy. In tomorrow’s session, industrial production and Empire State manufacturing data looks set to dominate the near term dynamics of the US Dollar against the majors.

Euro – European Markets

Despite decent Italian bond auctions and the Euro-group finance ministers giving a green signal to the disbursement of bailout tranches to Cyprus and Greece, the single currency failed to move higher against the US Dollar yesterday on easing concerns of a slowdown in the world’s largest economy. However, the common currency has managed to bounce back and nudged above the 1.30 mark against the US Dollar for a brief period in today’s trading session. The Euro remains susceptible to key event risks today, with the German ZEW sentiment indices data, due later today, holding market interest. Markets expect the survey to highlight that business morale improved for May. The Euro zone industrial production data also remains a key event on traders’ radar and with the recent German industrial data surprising on the upside, it remains to be seen whether today’s data also echoes similar buoyancy. Additionally, European Union finance ministers will continue to deliberate on a possible banking union and tax evasion at a meeting in Brussels. Going forward, the GDP data across Europe, due tomorrow, will be keenly eyed to unearth a clearer picture of the Euro region’s performance in the first quarter of 2013.

Other Currencies – Highlights

The New Zealand Dollar had come under pressure yesterday as an unexpected rise in US retail sales stoked speculation that the Fed might start altering its pace of asset purchases sooner than expected and prompted traders to adopt a cautious stance. However, the Dollar has managed to recoup most of its earlier session losses and is trading higher against the greenback this morning. On the macro front, data released overnight revealed that retail sales in New Zealand rose at a slower pace for the first quarter of 2013 as a long and warm summer sapped consumer demand for apparels. With a light domestic calendar today, the performance of manufacturing index for April, due tomorrow, will shed light on the nation’s manufacturing sector. Additionally, consumer confidence figures due on Friday will garner market focus. In today session, traders are expected to stay watchful of events unfolding in overseas markets, especially Europe, for further cues to risk appetite.