U.K. CPI falls to 2.0%

Lower inflation at home, confirmed by the latest inflation numbers yesterday, has eased pressure on the BoE to raise interest rates in the near future. However, steadily improving labour market conditions and rapidly inflating housing prices in the UK will influence the BoE’s decision in its upcoming policy meetings. Meanwhile, German GDP data out this morning showed that economic growth in the currency bloc’s largest economy slowed for 2013. In the US, positive retail sales numbers for December has further affirmed the upbeat consumer sentiment in the world’s largest economy. Today’s Beige Book report and a raft of crucial macro releases during the rest of the week will offer a clearer picture of the state of affairs in the US in the final quarter of 2013.

Pound Sterling – UK Markets

Yesterday, UK consumer price inflation fell to the BoE’s target rate of 2% for December, the lowest level since November 2009. The unexpectedly weak inflation numbers triggered a sharp but brief fall in the Pound against the majors yesterday. Sterling recovered later in the day, although the weak inflation numbers limited the gains against the majors. The biggest contributor to easing inflation for December was food prices which rose at the slowest pace since 2006. The moderating inflation over the past two months has laid waste to investors’ hopes of an interest rate hike in the near future. Meanwhile, the Pound has moved lower against the greenback in today’s trading session. With no major domestic economic data on tap, Sterling investors will keep a tab on the US Beige Book report later today for further indications of risk appetite. Furthermore, market participants will closely scrutinise Friday’s domestic retail sales print, especially in the aftermath of the surprisingly weak inflation report yesterday.

US Dollar – US Markets

Despite a better than expected domestic retail sales report, the greenback traded under pressure against the common currency yesterday. The year-end holiday season sales together with the cold weather boosted domestic sales numbers for December, pointing towards increased consumer spending during the final quarter of last year and raising expectations of steady economic growth during the period. Meanwhile, influential Fed policymakers, Richard Fisher and Charles Plosser, have advocated further cuts to the central bank’s massive asset purchases programme in the upcoming months. Fisher opined that persisting with bond purchases further will inflate asset prices and make it difficult for the Fed to exit QE. The US Dollar has gained traction and is trading on a firmer footing against the majors this morning. Against the backdrop of the largely positive domestic economic data lately, market participants will keenly follow today’s Beige Book survey report to ascertain the strength of the US economic recovery. Additionally the New York Fed manufacturing numbers will keep markets interested in the session ahead.

Euro – European Markets

Buoyed by upbeat Euro zone industrial production numbers for November which beat analysts’ forecasts, the Euro traded marginally higher against the US Dollar yesterday. Upbeat US economic data released later in the day capped the gains in the common currency against the greenback yesterday. Industrial output in the currency bloc notched its biggest rise since May 2010 adding to growing signs that economic recovery in the region is indeed gaining momentum. With recent macro data, including retail sales and manufacturing activity indicating a pickup in growth, the Euro zone economy is set to register a third consecutive quarter of growth in the fourth quarter of the last year. Meanwhile, the single currency has weakened against the majors in today’s trading session after reports indicated that the German economy expanded at a slower pace during the last year amid slower export growth and a drop in domestic investment. Meanwhile, data released earlier today has shown a rise in the inflationary trend in Spain, adding to the nation’s slew of recent upbeat economic data. With little on the domestic macro front to trigger risk appetite, the Euro-US Dollar will take direction from the US economic data later today.

Other Currencies – Highlights

The upbeat domestic retail sales report released earlier today had minimal impact on the Swiss Franc as the currency continued to trade lower against the majors this morning. The buoyant retail sales numbers will, to an extent, ease the pressure on the SNB after calls for a loosening of monetary policy had increased in volume in recent days following weak domestic data. The positive economic data from the US and Europe coupled with the relatively weak set of macro indicators from Switzerland has weakened the Swiss Franc against its peers over the past few sessions. In the absence of domestic economic data, movement in the Swiss Franc will be governed by important economic reports emanating from both sides of the Atlantic in the session ahead. However, investors will closely watch tomorrow’s speech by the SNB Chairman, Thomas Jordan for any hints about the central bank’s policy stance going forward.