Global Growth Concerns Persist

Risk appetite remained subdued yesterday as headwinds from the Euro-area and US led traders to adopt a cautious stance. Dismal first quarter GDP numbers across Europe and weak manufacturing and industrial activity in the US have reminded investors that all is not well in the global economy and further assistance from central banks might be on the cards in the near future. At home, there was something to cheer as the BoE, in its inflation report, raised its assessment of the UK economy and expects inflation to return to the target rate within two years. With a light domestic economic calendar for the rest of the week, a string of economic releases in the US will be closely watched for further cues.

Pound Sterling – UK Markets

Dismal GDP data across the Euro zone has continued to lend support to the Pound against the single currency in today’s trading session. However, Sterling oscillated between gains and losses against the US Dollar yesterday. The pair managed to gain ground following a decent employment report and upbeat growth forecasts from the BoE. However, the uptrend was short-lived as downbeat industrial production and regional manufacturing data in the US triggered a drop in risk appetite. Data released yesterday revealed that jobless claims in the UK declined for April, while the unemployment rate unexpectedly slipped for three months to March. In the midst of recent upbeat economic figures the BoE Governor, in his quarterly inflation report, issued a slightly improved outlook for growth and inflation. The central bank indicated that economic growth may accelerate to 1% this year, higher than its previous growth projection of 0.9%. In the absence of major economic news in the UK today, a raft of key releases from the US will prove crucial for the near term dynamics of Sterling.

US Dollar – US Markets

Disappointing sets of indicators from the US and the Eurozone helped the greenback to garner traction against the single currency in yesterday’s trading session. Data yesterday revealed that industrial activity in the US declined more than forecast for April, undermined by a decline in demand of weather related utilities. Further adding to the woes, the Empire State survey revealed a sharp slowdown in manufacturing activity for May. In this context, today’s Philadelphia manufacturing report will be closely tracked for further updates to recovery in the manufacturing sector. The consumer price inflation and initial jobless claims data, due later today, are also expected to remain key events on traders’ radar, considering its influence on the Fed’s future policy stance. However, with the recent manufacturing data coming in well below expectations, market speculation of the Fed tapering its asset purchases has taken a backseat. In today’s session, market focus is also expected to revolve around building permits and housing starts data scheduled later today, given yesterday’s encouraging NAHB housing data.

Euro – European Markets

As the Euro zone continues to grapple with its debt crisis, data revealed that growth in the region contracted more than expected for the first quarter of 2013, with the notable addition of Germany to the list. Weak European GDP data, coupled with downbeat US industrial production data released yesterday, induced a “risk off” sentiment among market participants that led the single currency to backtrack against its major peers in yesterday’s trading session. The common currency has continued to trade on a weaker footing in today’s session and with dire GDP results fuelling speculation of an ECB action, the upside for the Euro looks limited. The final Eurozone consumer inflation data due later, which is expected to remain unchanged at 1.2%, is likely to further reinforce expectations of additional easing to reignite the sluggish economy. With the economic landscape offering little to shout about, there is limited scope that the Euro will find something positive, at least during this week, to turn the tide in its favour. For further direction to risk appetite, news flow emanating from the US will hold the key for currency markets.

Other Currencies – Highlights

The Japanese Yen advanced against the Euro in yesterday’s trading session after downbeat economic data from the Euro zone and the US increased the appeal of safe haven currencies. Moreover, with the Japanese GDP figures surpassing market estimates, the yen has managed to hold on to its gains against the majors in today’s trading session. The efforts of policymakers to combat deflation and boost growth was reflected in today’s GDP report, which showed that the Japanese economy expanded more than forecast for the first quarter of 2013, bolstering hopes that recovery is gathering momentum. With little on the domestic economic calendar during the week, markets are likely to turn their attention to the BoJ policy meeting and trade balance data due next week.