Mark Carney’s efforts yesterday to convince markets that interest rates will remain lower for a considerable period of time went un-noticed as speculation continues to mount that the central bank might be compelled to tweak its policy stance and hike borrowing costs in the near future in the wake of the improving economic environment. The BoE added fuel to the fire by considerably raising its UK economic growth forecast for 2014.
Across the Atlantic, today’s retail sales and initial jobless claims data will gain investors’ attention, despite the possibility that the numbers may be distorted given the recent bad weather. In the Euro zone, the latest Euro zone monthly report and the German inflation data have failed to surprise markets, shifting focus towards tomorrow’s GDP reports.
Pound Sterling – UK Markets
Along expected lines, the BoE revised its forward guidance on policy in its Quarterly Inflation Report released yesterday. However, defying market speculation that the central bank will lower its unemployment rate target to 6.5% for further adjustments to policy, Mark Carney stressed that the BoE will consider a broad range of indicators, unemployment rate being one of them, before arriving at any decision. However, the BoE Governor assured investors that interest rates will remain lower for some time to come and even when it begins, the hike will only be gradual. Additionally, the central bank raised its UK economic growth forecast for 2014 to 3.4% from an earlier estimate of a 2.8% expansion, citing reduced uncertainty and stronger economic recovery.
Meanwhile, amid speculation that the BoE will be unable to hold interest rates lower for too long, the Pound strengthened against its peers yesterday and continues to trade firmer against the US Dollar this morning. With little on the domestic economic front today, investors in the Pound-US Dollar pair will keep a tab on news flows emanating from across the Atlantic for further direction.
US Dollar – US Markets
The US Dollar strengthened against the common currency yesterday after the release of weak economic data from the Euro zone. Additionally, the US reported a smaller than expected budget deficit for January, further validating belief that the US economy might record lower budget deficit figures in this fiscal year. Meanwhile, the St. Louis Fed President, James Bullard, stated that the Fed will adjust forward guidance and “make more qualitative judgments” on when to tighten policy, in the wake of the US unemployment rate hovering close to its existing 6.5% threshold level. On the political front, the US Senate has approved a bill to extend the government’s borrowing limit through March 2015, putting the debt ceiling issue to rest until next year.
Meanwhile, the greenback has moved lower against the majors in today’s trading session. Investors will closely scrutinise today’s domestic retail sales and initial jobless claims numbers to gauge the effect of the extraordinarily bad weather on consumer spending and the labour market. The rough weather has also postponed today’s testimony of the Fed Chief, Janet Yellen before the Senate Banking Committee.
Euro – European Markets
The weak EU industrial output data pressured the single currency against its peers in yesterday’s trading session. Moreover, ECB policymaker, Benoit Coeure’s comments that the central bank is “seriously” considering lowering its overnight bank deposit rate into negative territory further weighed on the Euro.
However, the ECB, in its monthly report released earlier today, reiterated its stance by stating that interest rates would remain at present or lower levels for an extended period of time. It remains to be seen how long the ECB can hold fire, especially given the risk of deflation setting in. Additionally, today’s German consumer price inflation report failed to surprise markets on the upside. Against the backdrop of weak economic conditions prevailing in the currency bloc during the latter part of last year, highlighted by yesterday’s weaker than expected December Euro zone industrial production numbers, tomorrow’s Euro zone and German fourth quarter GDP reports will be closely followed by Euro investors for further direction. Later today, important US macro releases will drive trading sentiment in the Euro-US Dollar pair.
Other Currencies – Highlights
The Aussie Dollar’s recent winning streak against the majors was arrested this morning after data released earlier today showed that the nation’s unemployment rate rose more than expected to 6% for January, the highest level since July 2003. The weak employment numbers has highlighted the broad weakness in the domestic labour market as the nation continues to struggle in its efforts to move away from mining-based economic growth. The latest labour market data is likely to weigh on the RBA’s mind and in this context, investors will keep a tab on a speech by Christopher Kent, the central bank’s assistant Governor, today.
With little of note on the domestic economic calendar for today and tomorrow, significant macro releases from both sides of the Atlantic as well as China will prove crucial for the Australian Dollar against the majors in the near term.