UK CPI Falls to 2.0%

The just released domestic consumer price inflation data has surprised markets on the downside, largely in sync with other economic data emerging out of Britain over the past few days. With the BoE refraining from changing its policy stance or altering forward guidance, investors will have to adopt a watch and watch policy to ascertain the central bank’s stance in 2014. In the Euro zone, industrial production numbers are likely to provide a positive surprise to markets, ahead of the crucial inflation report later this week. Across the Atlantic, today’s retail sales report has gained added significance, especially in the wake of Friday’s dismal payrolls report.

Pound Sterling – UK Markets

The UK consumer price inflation data just out has pointed towards an unexpected easing trend in price pressures for December. The weaker than expected print has limited the Pound’s gains against the US Dollar in today’s trading session, amid dwindling hopes of a change in stance by the BoE in the near future despite a steady improvement in the labour market. The Pound has slipped against the greenback over the past week on the back of the largely weak domestic economic data coupled with the BoE’s insistence on maintaining status quo with regards to its forward guidance in its monetary policy meeting last week. With no more domestic economic data scheduled to release for today, the crucial US retail sales numbers will drive trading sentiment in the Pound-US Dollar pair in the session ahead. Meanwhile, in a relatively light trading session, Sterling relinquished all of its gains from Friday and slipped below the 1.64 level against the US Dollar yesterday. Weak US employment numbers had propelled Sterling higher against the greenback in Friday’s session.

US Dollar – US Markets

The US Dollar recuperated from Friday’s disappointing non-farm payrolls setback to move higher against most of its peers yesterday. However, the greenback failed to gain traction and searched for direction against the common currency throughout yesterday’s subdued trading session. The weak labour market report has confounded markets about the status of future cuts to the Fed’s QE3 programme. Expressing similar concerns, the President of the Atlanta Fed, Dennis Lockhart, cautioned that the domestic labour market has not yet healed, while inflation also remains at worryingly low levels. However, Lockhart also supported small tapering measures in future as long as the US economic growth remained at 2.5% to 3% levels. Meanwhile, the greenback has moved lower against the Euro this morning. Investors will closely scrutinise today’s retail sales report which is expected to show a slight easing in the upward momentum in domestic sales for December. With recent patterns showing continued weakening in consumer spending, today’s retail sales report will give further insights about consumer sentiment in the world’s largest economy and will influence currency markets.

Euro – European Markets

With no major economic data to trigger risk appetite, the common currency traded range bound against the US Dollar yesterday. The mixed Italian industrial production and the better than expected Greek and Portugese consumer price inflation numbers failed to lift the Euro against the greenback. However, the single currency strengthened against the Pound yesterday. Meanwhile, the Euro is trading on a stronger footing against the US Dollar in today’s session ahead of the release of Euro zone industrial production report today. With analysts expecting a notable increase in the region’s industrial output for November, the Euro is likely to remain supported against its peers in the session ahead. Additionally, retail sales data from the US will undoubtedly sway market sentiment towards the Euro-US Dollar pair today. Looking ahead, market participants will closely scrutinise the Euro zone and German consumer price inflation reports later this week, especially in wake of the ECB President, Mario Draghi’s comments last week hinting at further loosening of monetary policy if deflation fears in the currency bloc resurface in the upcoming months.

Other Currencies – Highlights

The Japanese Yen has weakened against the majors this morning after trade data released earlier in the day showed that the nation’s current account deficit for November widened to a record level. Subsequently, the Japanese Yen slipped to the lowest level in over two weeks after climbing to fresh one-month highs against the greenback yesterday. Rising imports, primarily increased demand for energy due to nuclear plant shutdowns coupled with a weaker Yen contributed to the dismal numbers. The weak domestic economic data of late has highlighted challenges to the Japanese Prime Minister Shinzo Abe to lift the economy ahead of the proposed sales tax hike comes into effect in April this year. With little on the domestic economic front today, investors in the Japanese Yen will keep a tab on news flows emanating from both sides of the Atlantic for further direction to risk appetite. Furthermore, important domestic and international macro releases will keep on their toes during the rest of the week.