MPC/ECB Meetings Today

Against the back drop of largely mixed economic data from most European economies lately, today’s BoE and ECB meetings have gained added significance. Although neither central bank is expected to dish out any radical policy shift today, investors will closely scrutinise the meetings for the outlook towards the respective economies. Across the Atlantic, after the slight setback following the October government shutdown, the economy is steadily recuperating and recent gains in the labour market have offered support to the Fed QE3 tapering decision. However, policymakers’ concerns regarding low inflation in the nation have fuelled speculation that the Fed will pursue a wait and watch approach in the near term.

Pound Sterling – UK Markets

The Pound is searching for direction against the majors today as investors wait on the sidelines ahead of key monetary policy meetings in the Europe. Meanwhile, domestic trade balance data out just now showed the UK’s trade deficit narrowed for November. Though the BoE in its meeting is expected to leave its policy intact, expectations of the central bank revising its unemployment target going forward remain on the cards, given the steadily improving UK labour market and unemployment rate inching closer to the 7% target rate. Meanwhile, yesterday’s data from Halifax showed an unexpected decline in UK house prices for December, marking the first monthly drop since January 2013. The Pound continued to gain traction against the Euro, as traders adopted a cautious stance ahead of today’s monetary policy meeting in the Euro zone. Meanwhile, the Pound continued to hold well above the 1.64 mark against the US Dollar, as the FOMC minutes offered no clarity over the timing for unwinding the current monetary stimulus in the US.

US Dollar – US Markets

Buoyed by the unexpectedly strong domestic ADP employment numbers for December, the US Dollar strengthened against the common currency yesterday. The unexpected rise in private sector payrolls, which supports the Fed’s decision to trim its QE3 programme, was largely aided by gains in the construction and manufacturing sectors, with the former reporting the biggest increase in payrolls since 2006, reflecting the recent housing market resilience. However, the greenback’s upward momentum was arrested after the release of the FOMC meeting minutes later during the day. The minutes showed that despite a general consensus of recovery in the labour market, policymakers remain concerned about low inflation in the nation. Additionally, the minutes revealed that declining benefits of QE3 measures over time prompted the central bank to eventually taper its asset-purchase programme in last month’s meeting. Meanwhile, the greenback has moved lower against the majors this morning ahead of the release of the domestic initial jobless claims report later today. Against the backdrop of yesterday’s upbeat employment report, investors will keenly follow today’s initial jobless claims and tomorrow’s unemployment numbers for further insights.

Euro – European Markets

The Euro traded lower against the US Dollar yesterday despite the release of upbeat Euro zone and German economic data. The monthly retail sales for November in the currency bloc rose at the fastest pace since November 2001, fuelling expectations that a pickup in domestic demand will boost the region’s economic recovery. Additionally, factory orders in Germany also surged higher for November. Meanwhile, the unemployment rate in the Euro zone remained steady at 12.1% for November. The single currency is trading on a stronger footing against the US Dollar in today’s trading session. Investors in the Euro have their hands full in terms of domestic economic releases today, including the Euro zone consumer and business sentiment indices and the German industrial output report later today. However, the ECB monetary policy meeting and the subsequent press conference by the ECB President, Mario Draghi, will gain most market attention today. With the Euro zone inflation numbers slipping again for December, fears of deflation have come to the fore and have put pressure on the central bank to take further action.

Other Currencies – Highlights

The Australian Dollar has slipped further against the majors this morning after domestic data released earlier today showed that building approvals in Australia slipped more than expected for November, highlighting continued weakness in the domestic housing market. Furthermore, Australia’s biggest trading partner, China, also posted disappointing consumer price inflation number earlier in the day, further weakening the Australian Dollar against its peers. The string of downbeat economic reports largely swept aside the unexpectedly upbeat domestic retail sales data. With recent economic data, including the latest manufacturing and services PMI reports, painting a bleak picture of the Australian economy, the possibility of the RBA resorting to further easing measures in the near future cannot be ruled out. With little on the domestic macro front to trigger risk appetite, investors will keep a tab on news flows emanating from both sides of the Atlantic during the rest of the week for further direction.