The UK economic recovery gained steam in 2013, largely driven by supportive government policies and consumer spending. The latter is likely to stimulate the economy further during the current year, especially considering the buoyant consumer sentiment print for January. Macro data in the coming months will give further insights as to whether upbeat sentiment resulted in increased spending.
In the US, although the economy ended 2013 on a stronger footing, its sustainability will be hard pressed in 2014, especially with the Fed gradually tapering its stimulus measures. In the Euro zone, yesterday’s weak German inflation data caused some jitters in markets and today’s Euro zone inflation numbers have the potential to alter market sentiment in the session ahead.
Pound Sterling – UK Markets
The Pound moved lower against the US Dollar yesterday, largely tracking the US Fed decision to further scale down its asset purchases the day before. Additionally, the weaker than expected domestic mortgage approvals report further pressurised Sterling against the greenback. Although mortgage approvals numbers failed to top market estimates, the December print was the highest since January 2008 and provides further evidence that recovery in the UK housing market continues to accelerate. However, Sterling climbed against the Euro yesterday, following the release of mixed German economic data.
Meanwhile, driven by the overall improvement in domestic economy as well as personal finances, consumer sentiment in the UK surged to the highest level since September 2007 for January. However, despite the upbeat sentiment report, Sterling has weakened against its peers this morning. With rising consumer confidence expected to drive an increase in spending, the UK economy looks set to build on its growth momentum picked up during the last year and into 2014. Against this backdrop, next week’s BoE monetary policy meeting and the slew of domestic economic data will attract considerable investor attention.
US Dollar – US Markets
The Fed’s QE3 tapering decision on Wednesday continued to influence trading sentiment in currency markets, underpinning demand for the US Dollar. Additionally, relatively downbeat European economic reports further played into the hands of greenback investors yesterday. However, the US Dollar failed to sustain its upward momentum after domestic data released later in the day once again confounded investors over the strength of the US economic recovery. While the fourth quarter US GDP grew on expected lines, highlighting a strong end to the previous year, domestic labour market continues to offer mixed signals with initial jobless claims unexpectedly rising during the last week. Against this backdrop, next week’s non-farm payrolls print will prove to be crucial for the US Dollar against its peers in the near term.
The greenback is trading in a tight range against the Euro this morning ahead of the release of crucial consumer spending report later today. With consumer sentiment in the US improving lately, an upside surprise on this front cannot be ruled out. Looking forward, investors will closely scrutinise next week’s manufacturing and services PMI reports for further direction to risk appetite.
Euro – European Markets
The common currency weakened against the majors yesterday as the Fed QE3 tapering decision continued to weigh on the currency amid increased demand for the greenback. Additionally, the weaker than expected Euro zone sentiment indices report and the unexpected easing in the German consumer price inflation further weakened the single currency against its peers. While the Euro zone consumer confidence improved as expected for December, business confidence indicators rose at a weaker than expected pace, reversing the recent trend of upbeat sentiment indices in the currency bloc. Furthermore, with energy prices treading lower, inflation in Germany eased for January and is likely to impact the Euro zone inflation print later today.
Meanwhile, the unexpectedly disappointing German retail sales numbers released earlier today have had little impact on the Euro against the majors this morning as investors continue to remain on the sidelines ahead of the inflation report. Additionally, the Euro zone unemployment numbers will also be closely followed by Euro investors today. The duo have assumed significant importance in the wake of the ECB policy meeting next week.
Other Currencies – Highlights
The Japanese Yen has strengthened against the majors this morning after data released earlier today showed that consumer price inflation in the nation climbed at the fastest pace in over five years for December. With inflation heading steadily towards the BoJ’s 2% target, the ultra-loose monetary policies endorsed by the Japanese Prime Minister, Shinzo Abe to fight deflation are finally beginning to bear fruit. However, the impact of the proposed sales tax hike on recent gains in inflation will be closely scrutinized in the coming months. Meanwhile, upbeat labour market, manufacturing PMI and industrial production reports also lifted investors’ sentiment towards the Japanese Yen today.
With no domestic economic data to trigger risk appetite, news flows emanating from both sides of the Atlantic will drive trading sentiment in the Japanese Yen in the session ahead. Looking ahead, in the midst of a relatively light domestic economic calendar next week, the US and Euro zone macro data will prove crucial for the Japanese Yen against the majors.
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