Halifax House Price Index Falls to 7.5%

While the latest UK manufacturing and services PMI reports have somewhat disappointed Sterling investors, the continued buoyancy in the housing market, irrespective of today’s weak Halifax housing prices report, has kept markets in a cheerful mood. Against this backdrop, it remains to be seen if the BoE will introduce additional measures to curb the housing market gains in its meeting tomorrow. Meanwhile, following an unexpected drop in the Euro zone inflation numbers for December, today’s unemployment report will be closely watched by investors and the ECB alike, ahead of the central bank’s policy meeting tomorrow. However, today’s FOMC meeting minutes will be key event risk after the central bank hit the ‘slowdown’ button on QE3. Additionally, the ADP employment numbers will also be closely scrutinised.

Pound Sterling – UK Markets

With little in terms of domestic economic releases, the Pound searched for direction against the US Dollar yesterday tracking news flows from across the Atlantic. Additionally, the overnight release of the December BRC shop price index report which showed the sharpest fall in British shop prices since December 2006 further weighed on the Pound against the greenback, although the fall can be attributed to deep discounts offered by retailers during the Christmas shopping season. Investors have largely remained on the sidelines over the past two days ahead of the BoE monetary policy meeting tomorrow and will keep a close watch for any hints about any change in the central bank’s policy stance in the near future. Meanwhile, the Pound has nudged higher against the majors in today’s session despite the release of a downbeat domestic housing market report earlier today that showed an unexpected fall in house prices in the UK for December. The release of the latest FOMC meeting minutes will determine trading sentiment in the Pound-US Dollar pair in the session ahead.

US Dollar – US Markets

The surprisingly upbeat US trade data lifted the greenback against the Euro yesterday. The US trade deficit shrunk to a four-year low for November, primarily on the back of record exports of US goods and services and the drop in oil imports, reflecting a surge in domestic energy production. The upbeat domestic economic data of late has boosted hopes that the Fed will continue to reduce the pace of bond buying in its upcoming meetings. Endorsing the popular view, John Williams, the San Francisco Fed President and Eric Rosengren, the Boston Fed President and a noted dove, indicated that if the domestic economy continues to grow, the central bank will gradually reduce the pace of its bond buying. Williams also stated that the Fed is likely to eventually eliminate asset purchases over the course of 2014. Against this backdrop, minutes of the latest FOMC meeting to be released today will offer insights into what conspired at the meeting before the QE3 tapering decision was made. Meanwhile, the greenback is trading higher against the Euro this morning. Apart from the FOMC minutes, the ADP employment report will keep markets interested today.

Euro – European Markets

Yesterday’s unexpectedly weak Euro zone consumer price inflation report together with the upbeat US economic data pushed the common currency lower against the greenback. The easing Euro zone inflationary pressures for December will strain the ECB into easing monetary policy further in the coming months, although the central bank is unlikely to pull the trigger on interest rates immediately in its monetary policy meeting tomorrow. However, a fall in the number of unemployed people in Germany for December kept the Euro supported against the majors yesterday, although the unemployment rate remained steady at 6.9%. Meanwhile, the single currency has moved lower against the majors in today’s trading session ahead of the release of a crucial Euro zone unemployment report. The labour market conditions in most of the Euro zone economies, including Germany and Spain, have been improving lately. Additionally, the Euro zone retail sales report for November and the minutes of the Fed’s latest policy meeting will also gain market attention and weigh on the Euro-US Dollar pair today.

Other Currencies – Highlights

The Canadian Dollar has failed to arrest yesterday’s downward trend against the majors this morning as weak domestic economic data and dovish comments made by the Bank of Canada Governor, Stephen Poloz, continue to weigh on the currency. While the merchandise trade deficit widened unexpectedly for November, manufacturing activity in Canada contracted unexpectedly to 46.3 for December, the lowest since May 2009. Additionally, the Governor expressed concerns over low domestic inflation, which has remained well below the central bank’s target rate, thereby fuelling speculation that the BoC may cut interest rates in the near future to spur inflation and support the fragile economy. With no major domestic economic data on tap today, investors in the Canadian Dollar will closely follow news flows emanating from across the Atlantic for further direction to risk appetite in the session ahead.