BoE Scales Back Funding for Lending Scheme

After relentlessly rebuffing claims of a brewing domestic housing bubble over the past few months, the BoE surprised markets yesterday by scaling back its credit boosting programme, in what might be the first step towards scaling back of stimulus measures. The move comes in the midst of a steadily improving economy and labour market and just days after the central bank raised the nation’s growth outlook. However, today’s dwindling consumer confidence and weak housing numbers may act as a damper on Britain’s growth prospects in the days ahead. Meanwhile, all eyes are set on today’s Euro zone consumer price inflation numbers and a pick up in the inflationary trend in the region will deter the ECB from testing unchartered waters of negative deposit rates at least in the near term.

Pound Sterling – UK Markets

The Pound climbed to the highest level in more than two-years against the greenback yesterday after the BoE Financial Stability Report indicated that the nation’s economic recovery has strengthened. In a bid to avoid a potential housing bubble, the central bank decided to scale back the Funding for Lending Scheme, which has boosted demand for mortgage lending. The BoE also played down talks of a swift interest rate hike by warning that a sharp rise in interest rates posed a threat to stability, especially if not accompanied with rising incomes. Highlighting similar concerns, Britain’s consumer confidence deteriorated for the second consecutive month for November, as the slow rise in wages made consumers more pessimistic, despite the brighter economic outlook. Meanwhile, Sterling is trading lower against the majors this morning, following a lower than expected rise in mortgage approvals and weak lending to individuals. A string of domestic and international economic releases will influence Sterling investors during the next week. Important Euro zone macro releases will keep investors on their toes in the session ahead.

US Dollar – US Markets

With no macro releases from the US on account of the Thanks Giving holiday, the greenback nudged lower against most of its peers yesterday in a relatively light trading session, amid a barrage of positive economic data from across the globe. While the BoE moved towards curbing the booming housing market in the UK, the upbeat German consumer price inflation report dampened hopes of the ECB resorting to further policy loosening, thereby underpinning demand for the Pound and the common currency, respectively. Meanwhile, the greenback is trading in a tight range against the majors in today’s trading session, even as traders brace for another day of a light US economic calendar. Later today, the Euro zone inflation and unemployment numbers will sway market sentiment in the Euro-US Dollar pair. In the forthcoming week, the US non-farm payrolls print is expected to grab maximum market attention. Apart from the labour market report, investors will keep a tab on a barrage of important US macro releases for further insights about the status of the US economic recovery.

Euro – European Markets

In a rather subdued trading session yesterday, the better than expected German consumer price inflation numbers and the Euro zone sentiment indices lifted the common currency against the US Dollar. However, the German labour market and retail sales have unexpectedly deteriorated, indicating that headwinds continue to persist for the German economic recovery. However, business confidence in the Euro zone improved for November, lifting prospects of an economic recovery. Meanwhile, the Euro has moved higher against the majors this morning. Investors will be firmly glued to the Euro zone consumer price inflation report today which is expected to show an improvement from the four-year low in the previous month that prompted talks of negative deposit rates to spur inflation and growth in the currency bloc. In another development, S&P raised its outlook on Spain's sovereign rating to stable from negative, while stripping the Netherlands of its AAA grade. Apart from the inflation report, the Euro zone unemployment print will also gain market attention today. Looking ahead, a string of domestic and global economic data will prove crucial for the Euro against the majors next week.

Other Currencies – Highlights

The Yen has nudged higher against the US Dollar this morning, but is trading near its six-month lows after data released earlier in the day painted a mixed picture of the Japanese economy. Although, domestic consumer price inflation edged up for October, it remains well below the BoJ’s 2% inflation target. The somewhat muted rise in inflation continues to weigh on the Yen against the majors amid speculation that the central bank may expand its aggressive monetary policy in the coming months to achieve the inflation target by 2015. Meanwhile, manufacturing activity rose for November, while the October industrial production print unexpectedly came in lower than estimates. Also, Japan’s unemployment rate remained steady for October, thereby restricting the Yen’s gains against the US Dollar. With a relatively light domestic economic calendar, the Yen will take direction from news flows emanating from both sides of the Atlantic during the next week.