IMF Chief Warns of Risks to Recovery

While central bankers from Europe as well as Japan sounded relatively positive about their respective economies recovering and attaining inflation targets, Christine Lagarde, the IMF Chief, downplayed these optimistic comments warning that downside risks to the global economic recovery persist. She identified the Fed’s QE3 tapering and low inflation in the Euro zone as the principal threats. Against this backdrop, the FOMC meeting this week and the slew of economic data from the US and Euro zone will grab attention. Meanwhile, the German economic recovery seems to be back on track, with business sentiment reflecting strength. At home, Mark Carney has indicated a possible shift in the BoE guidance and events unfolding in the coming days will be closely scrutinised for further hints.

Pound Sterling – UK Markets

The downbeat domestic mortgage approvals report weighed on the Pound against the majors on Friday, with the currency weakening against both the greenback and the Euro. Although, mortgage approvals for December rose to the highest level since September 2007, the weaker than expected print dampened market sentiment towards Sterling. Meanwhile, the BoE Governor, Mark Carney’s opined that given the unexpectedly swift improvement in the domestic labour market, the central bank will consider altering its forward guidance in the near term. However, BoE policymaker, Martin Weale, indicated his reservations for lowering the BoE’s unemployment threshold. Meanwhile, Sterling is trading higher against the US Dollar in today’s trading session. With no domestic economic data scheduled for release today, the UK fourth quarter GDP report due tomorrow will be closely eyed by Sterling investors, especially in the wake of largely positive economic data lately. Additionally, the UK consumer confidence print for January later this week will also prove crucial for the Pound against the majors in the near term.

US Dollar – US Markets

In a relatively light trading session, the US Dollar searched for direction against the common currency on Friday. In the absence of domestic macro-economic data, the greenback took direction from news flows emanating from the World Economic Forum in Davos where European central bankers sounded largely upbeat about economic recovery in their respective countries. Meanwhile, Christine Lagarde, the head of the IMF, indicated that the Fed’s QE3 tapering measures initiated late last year are likely to cast a shadow over the global economic recovery in the near term. The greenback has moved lower against the Euro in today’s trading session following the release of upbeat German economic data earlier in the day. After a rather subdued week, investors have their hands full in terms of domestic macro releases this week, beginning with today’s services PMI, housing market reports and the Dallas Fed manufacturing print. However, most of the market attention will be focused on the outcome of the Fed monetary policy meeting on Wednesday, for further hints about Fed’s stance for 2014.

Euro – European Markets

The German Ifo sentiment indices released earlier today have shown further improvement in the nation’s business conditions and expectations for January, indicating that recovery in the Euro zone’s largest economy is gathering steam. Subsequently, the Euro has moved higher against the greenback this morning. With recent German economic data painting a positive picture of the economy, this week’s barrage of domestic macro reports, including the consumer price inflation, consumer confidence and retail sales numbers will be closely scrutinised for further direction. Additionally, important Euro zone and US economic data will also attract market attention in the week ahead. The Euro traded largely range bound on Friday. Meanwhile, the ECB President, Mario Draghi, opined that although there has been a “dramatic improvement” in the Euro zone economy over the past two years, economic recovery in the currency bloc continues to remain fragile and uneven. However, he expressed confidence that the central bank will achieve its 2% inflation target in the medium term. Contradictory to this, the managing director of the IMF, Christine Lagarde, opined that deflationary risks in the region pose a threat to the global economic recovery.

Other Currencies – Highlights

The Japanese Yen is trading on a weaker footing against the majors this morning after the nation reported record annual trade deficit for 2013 earlier today, largely due to a weaker Yen and rising energy imports. Meanwhile, the minutes of the latest BoJ monetary policy meeting revealed that economic recovery in Japan is likely to continue at a moderate pace. Furthermore, policymakers indicated that immediate additional stimulus measures may not be required in the wake of rising inflation expectations in the nation. Haruhiko Kuroda, the Governor of the Bank of Japan, expressed optimism about the nation’s economic growth, opining that the central bank’s 2% inflation target will be attained within the next two years. With little on the domestic macro front to trigger risk appetite, investors in the Japanese Yen will keep a tab on the US economic data today for further direction. Additionally, a barrage of domestic macro releases will keep investors on their toes during the rest of the week.