UK Labour Data Supports Recovery Signs

Contrary to yesterday’s inflation report pointing towards easing inflationary pressures in the UK, the just out upbeat employment numbers have once again reinforced signs of economic recovery. The current scenario makes today’s BoE quarterly inflation report all the more interesting, with market participants eager to ascertain the central bank’s take on the nation’s inflation and growth trends in the final quarter of 2013. Additionally, speculation of the BoE implementing its exit strategy sooner than expected has gained traction. Across the Atlantic, comments by Fed officials continue to confound markets on the timing of QE3 tapering, although broad market consensus points towards a March reduction in asset purchases, unless further downside risks to the economy emerge in the intervening period.

Pound Sterling – UK Markets

Fresh on the heels of yesterday’s surprise fall in consumer price inflation, the just released upbeat labour data has led Sterling to edge higher against the majors. Data showed that the number of people claiming jobless benefits in the country declined more than expected, while the unemployment rate fell to 7.6%. With the jobs market showing signs of structural gains, speculation of the BoE implementing its exit strategy sooner than expected has gained traction. In the wake of recent optimism in the domestic economy, the BoE quarterly inflation report later today will be a key guide to the Pound in the near term. Additionally, Mark Carney’s speech will be closely watched by investors to gauge the central bank’s outlook towards the economy going forward. Yesterday’s weaker than expected domestic inflation data dragged the Pound lower against its peers, with Sterling nudging below the 1.59 level against the greenback. The sharp fall in October inflation numbers was largely driven by the biggest drop in transport prices since July 2009.

US Dollar – US Markets

The US Dollar moved lower against the Euro yesterday as mixed signals from Fed officials regarding the timing of QE3 withdrawal continue to confound traders. While Minneapolis Fed President, Narayan Kocherlakota, opined that reducing the pace of asset purchases now will be a drag on the US economic recovery, Dallas Fed President, Richard Fisher, urged the markets to brace for tapering, stating that the stimulus programme “cannot go on forever”. Elsewhere, taking a note of the weak domestic inflation, Atlanta Fed President, Dennis Lockhart, stated that the Fed must let inflation accelerate towards its 2% target before it considers trimming the bond buying programme. Meanwhile, Chicago's national activity index for September inched up slightly, on the back of modest gains in production. The greenback is trading in a tight range against its peers in today’s trading session. With little on the domestic macro front, investors in the US Dollar will track events from across the Atlantic for further direction in the session ahead.

Euro – European Markets

The common currency extended its early week’s upward momentum into yesterday’s session to climb above the 1.34 mark against the US Dollar. The single currency has recouped some of last week’s losses it suffered against the greenback in the aftermath of the weak domestic economic data and the ECB’s decision to slash its benchmark interest rates in its ensuing policy meeting. Meanwhile, the German consumer price inflation remained at a three-year low for October as falling oil prices countered the rising cost of living in the nation, adding to ECB worries of deflationary pressures in the Euro zone. Meanwhile, the Euro is searching for direction against the US Dollar in today’s trading session ahead of the Euro zone industrial production report today. Any positive surprises on this front will further strengthen the single currency against the majors. Later this week, the German and Euro zone third quarter GDP reports will be closely watched by market participants for further direction to risk appetite.

Other Currencies – Highlights

The New Zealand Dollar nudged marginally lower against the greenback this morning after the RBNZ Governor, Graeme Wheeler, raised concerns on the impact higher rates would have on the Kiwi Dollar, as the central bank plans to hike its interest rate next year. The RBNZ will be one of the first central banks among developed economies to raise borrowing costs to counter soaring inflation driven by rising home prices. The governor also highlighted the threat to New Zealand’s financial system due to a potential slowing of the Chinese economy. Additionally, speculation surrounding the scaling back of the Fed’s QE programme continues to pressurize the Kiwi Dollar. Meanwhile, the overnight domestic retail sales and manufacturing PMI data will prove crucial for the Kiwi Dollar against the majors going forward. Apart from the domestic macro releases, investors will keep a tab on news flows emanating from both sides of the Atlantic during the week for further direction.