BoE Quarterly Inflation Report on Radar

The just out positive domestic economic data has further strengthened the belief that the UK economic recovery is gaining steam, especially the labour market which continued to build upon its last month’s stellar performance. Against the backdrop of an improving domestic economy and the inflating housing market, it remains to be seen if the BoE will offer any hints about a possible interest rate hike in the near future in its quarterly inflation report later today. In the Euro zone, following today’s largely positive European inflation reports, market focus will now shift to the Euro zone industrial output data later today and the string of crucial European macro releases tomorrow. In the US, yesterday’s dismal retail sales report will to a certain extent dampen expectations of a robust US recovery in the second quarter.

Pound Sterling – UK Markets

The just out positive labour market report has lifted the Pound against its major counterparts in today’s trading session. The unemployment rate dropped further for March, while the number of people seeking jobless benefits in the nation continued to fall, albeit at a slower pace, for March. The latest numbers further support the notion that recovery in the nation’s labour market continues to remain strong. Market attention has now shifted to the quarterly inflation report later today for clues on the timing of the first hike in the policy rate. However, the central bank is widely expected to revise down its inflation forecast given the slightly softer than expected inflation prints and the strength in the currency this year. Yesterday, the Pound continued to trade on a firmer footing against the Euro following reports that the German central bank would back the ECB’s decision to unveil additional stimulus measures in the Euro bloc in its next month’s meeting. However, Sterling gains were limited against the single currency as investors remained on the sidelines ahead of today’s crucial labour market and quarterly inflation reports.

US Dollar – US Markets

Weaker than expected retail sales numbers failed to arrest the upward momentum in the US Dollar against the single currency following reports that the German Bundesbank is ready to back the ECB policy measures in its June meeting to revive inflation in the Euro bloc, if required. Data released yesterday indicated that domestic retail sales slowed more than expected for April after March’s gain was revised upwards. Separately, the small business confidence index rose to its highest level since the financial crisis, thereby bolstering hopes of acceleration in economic activity in the second quarter of 2014. With no major domestic macroeconomic data in the US today, the greenback is trading in a tight range, albeit on a weaker footing against the Euro and the Pound in today’s trading session. Meanwhile, investors in the Euro-US Dollar pair will keep a close watch on tomorrow’s crucial macro data, especially the US inflation and regional manufacturing reports along with the first quarter GDP numbers across Europe and the final Euro zone inflation reading for further direction.

Euro – European Markets

Dovish comments from the Bundesbank and weaker than expected Euro zone and German economic sentiment report led the Euro to extend its losses against the US Dollar in yesterday’s trading session. Media reports indicated that the German central bank is willing to support the ECB’s decision to implement fresh stimulus measures next month, if required to combat low inflation. Additionally, the ZEW survey indicated that investors grew more optimistic about current conditions in Germany while their outlook for the region deteriorated further for May, thereby intensifying speculation that the ECB will take measures to counter the slowdown in the region. Meanwhile, the common currency is trading on a firmer footing against the greenback in today’s trading session. Data released earlier today confirmed that consumer price inflation in Germany improved while that in France slowed for April, raising fears over the inflation outlook in the region. In the wake of weak industrial output data for March released in most of the European economies last week, today’s Euro zone industrial production report is likely to echo a similar tone.

Other Currencies – Highlights

The New Zealand Dollar is trading higher against the US Dollar in today’s trading session. The Reserve Bank of New Zealand (RBNZ) in its half yearly financial stability report highlighted that although the nation’s financial sector remained strong, it continued to face risks from the high external and housing debt. The RBNZ Governor, Graeme Wheeler, opined that house prices in New Zealand remained overvalued and that further policy tightening might depend on the strength of the Kiwi Dollar. Additionally, data released earlier revealed that retail sales advanced, although at a slower pace for the first quarter of 2014, as slowdown in the housing market and higher interest rates led consumers to hold on to their expenses. Meanwhile, market participants will keep a close tab on today’s manufacturing activity report for April for further direction. Additionally, this week’s crucial US macro data will be in focus, especially inflation and the Reuters/Michigan consumer sentiment reports to gauge the pace of recovery in the world’s largest economy.