UK Trade Deficit Widens

Recent economic reports at home, including the latest PMI data and the just out weak trade numbers, are hinting at a possible easing in the UK growth trend during the second quarter of this year. Against this backdrop, the BoE’s decision to stay pat on its policy stance, despite numerous calls of late to raise interest rates seems to be the right decision. The Euro was pretty volatile yesterday as the ECB tested unchartered waters, introducing negative deposit rates and unleashing a raft of measures to counter deflationary pressures and prop up the region’s economy, while keeping the door open for additional easing measures in future, including QE, if needed. In the US, today’s non-farm payrolls data will attract maximum market attention.

Pound Sterling – UK Markets

On expected lines, the BoE left its benchmark interest rate unchanged at 0.5%, while maintaining its asset purchase facility steady at £375 billion in its monetary policy meeting held yesterday. This coupled with the ECB’s policy measures lifted the Pound against the US Dollar yesterday. With the BoE unwilling to offer any hints about its future course of action over interest rates, markets will continue to wait and watch the central bank’s next move. Meanwhile, Sterling dropped against the Euro after the ECB unveiled fresh measures to counter deflationary pressures in the region, thereby becoming the first central bank to implement a negative deposit rate. Data from Halifax released yesterday indicated that the UK housing market continues to remain a concern, as house prices continued to show an upward trend for April. In today’s trading session, Sterling has shown little reaction to the weak trade balance data in the UK which indicated that trade deficit widened more-than-expected for April. With no decisive domestic triggers on tap for the rest of session today, markets will keep a close watch on the US non-farm payrolls report to gauge recovery in the nation’s labour market ahead of next week’s domestic employment figures.

US Dollar – US Markets

The greenback registered gains against the single currency in yesterday’s trading session following the ECB’s rate cut announcement. The ECB became the first major central bank to charge fees on deposits while indicating that the interest rates have reached their lowest levels. However, the US Dollar pared its gains later in the session after the ECB Chief unveiled other plans to support an economy threatened by deflation. The ECB’s policy meeting overshadowed initial jobless claims data in the US which indicated that the number of people filing for jobless benefits rose more than expected last week. Separately, Narayana Kocherlakota, a Fed official, stated that the central bank would need to keep interest rates low, possibly for the next five years, citing the inability of the central bank to meet its employment and 2% inflation targets. The US Dollar is trading in a tight range against its major peers this morning. In the wake of mixed jobless claims report during the past month and this week’s dismal ADP employment figures, a similar trend in today’s non-farm payrolls cannot be ruled out. Market participants expect a slower pace of job additions in May, with the unemployment rate inching up to 6.4%.

Euro – European Markets

The ECB dominated market action yesterday as it took bold steps to counter deflationary pressures and boost the region’s economy, prompting a volatile session yesterday, especially for the Euro. The ECB lowered its benchmark interest rate and deposit rate, taking the latter into the negative territory for the first time in its history. Although the Euro dropped against the majors after the rate announcement, comments from the ECB President, Mario Draghi, lifted the single currency which moved above the 1.36 mark against the US Dollar. The ECB Chief unveiled a package of extraordinary easing measures and stated that interest rates in the region have reached their lowest levels. Additionally, he opined that the central bank expects inflation in the Euro zone to remain low in the near term and might intensify preparations to purchase asset backed securities going forward if economic outlook in the region worsens further. The Euro is trading in a tight range against the majors this morning. Data released earlier today indicated that the monthly industrial activity in Germany rebounded less than expected for April. Going forward today’s, crucial US non-farm payrolls data will be closely watched.

Other Currencies – Highlights

After strengthening against the majors yesterday, the Swiss Franc has shown little reaction to the better than expected domestic consumer price inflation report released earlier today which indicated that inflation in the nation is slowly picking up. Additionally, domestic industrial activity for the first quarter rose at a faster pace compared to the previous quarter. With the ECB loosening its policy stance to lift inflation in the Euro zone and the US reporting weaker than expected jobless claims numbers, the Swiss Franc had moved higher against both the Euro and the greenback yesterday. With no more domestic macro releases scheduled today, investors in the Swiss Franc will keep a tab on the crucial US labour market report in the session ahead for further direction to risk appetite. Moving ahead, next week’s domestic retail sales report and a slew of global macroeconomic releases will influence investors’ sentiment towards the Swiss Franc.