Overall risk sentiment got a lift, as the Fed Chief explicitly indicated that the central bank has not downgraded its view on the economy in the wake of the latest spate of mixed economic data. Additionally,the US House of Representatives passed legislation raising the government’s borrowing limit, thereby putting fiscal concerns on the backburner.
Across the Atlantic, comments from both the ECB and the BoE heads are likely to hold significance and could possibly guide the forex market in today’s session. The BoE, in its Quarterly Inflation Report, is widely expected to embrace new formal targets for its monetary policy. These targets are expected to leave little room for higher interest rates in the immediate future.
Pound Sterling – UK Markets
In the run-up to the BoE’s Quarterly Inflation Report, to be presented today by the Governor Mark Carney, the Pound is trading range bound against its peers this morning. With Carney himself hinting at a revision to the guidance policy earlier this month, speculation is rife that the central bank may lower its unemployment rate criteria to 6.5% from the present 7% for a potential interest rate hike in future. Whether or not Mark Carney alters his forward guidance, the Quarterly inflation Report will certainly result in some volatility in currency markets in the session ahead.
Meanwhile, Sterling moved higher against the majors yesterday after the CBI projected the UK economy to expand by 2.6% in 2014, up from its November forecast of 2.4%. The CBI also projected the nation’s unemployment rate to drop to 6.8% in 2014 and 6.6% by the end of 2015. Later today, apart from the BoE report, Sterling investors will also keep a tab on global macro releases for further direction to risk appetite.
US Dollar – US Markets
The US Dollar registered modest gains against the common currency and the Japanese Yen, as the recently appointed US Federal Reserve Chief, Janet Yellen, stuck to the script by announcing that further tapering of the Fed’s asset purchases remains on cards despite the latest set of mixed economic data. Moreover, fiscal worries in the US are unlikely to offer any near term jitters, as the US House of Representatives approved a bill permitting the US Treasury to continue borrowing normally until March 2015 in order to meet its payment obligations.
With the latest events from the US triggering no major volatility in the currency markets, the focus now shifts to gauge views of both the major central bank Chiefs in Europe for cues over the stance the central bankers might adopt in 2014. Today’s budget statement will attract attention in order to monitor the trend of improving fiscal health after last year’s sequester cuts. With abnormal weather conditions in the US triggering weakness in the overall US economic environment, tomorrow’s retail sales data is likely to indicate whether the US consumer morale was susceptible to the recent economic weakness.
Euro – European Markets
After trading in a wide range against the US Dollar throughout yesterday, the common currency closed the session lower. The absence of domestic economic data together with the Fed Chief, Janet Yellen’s comments that the central bank will continue with its QE3 tapering in its upcoming meetings weighed on the Euro against the greenback yesterday.
Meanwhile, the single currency is trading in a tight range against the US Dollar in today’s trading session. The ECB had decided to hold interest rates steady in its monetary policy meeting last week while its President, Mario Draghi, had rebuffed talks of deflation in the currency bloc. Today’s speech by Draghi will be closely scrutinised by market participants in this context for further insights over his outlook towards the Euro zone economic recovery, especially the weak consumer price inflation. Additionally, trading sentiment in the Euro-US Dollar pair will also be influenced by the Euro zone industrial production report later today, which is expected to show that the region’s output eased for December.
Other Currencies – Highlights
The Swiss Franc is trading firmer, albeit in a tight range, against the majors in today trading session after data released earlier today showed that the nation’s consumer price inflation rose in line with market expectations for January. Despite the SNB placing a cap on the currency to fight off deflationary pressures and spur economic growth, price pressures in the nation continue to remain subdued. With inflation failing to pick-up, the SNB is likely to maintain its cap on the currency for an extended period of time.
With no domestic economic data on tap later today, news flows emanating from both sides of the Atlantic will be closely followed by investors in the Swiss Franc for further direction to risk appetite. Moving forward, in the wake of a relatively light economic calendar, important US and Euro zone economic reports will prove crucial for the Swiss Franc against the majors in the week ahead.
Dollar Weakens as Fed Rate Cut in July Seems Imminent