UK House Prices Posing a Big Risk to the Economy

In the midst of spiraling house prices at home, as evident from Righmove housing data, the BoE Governor acknowledged that the housing market posed a big risk to the domestic economic recovery. Against the backdrop of the BoE’s assessment last week that there is still slack in the UK economy and thus more room for growth, a string of crucial domestic macro releases scheduled this week will be closely followed by Sterling investors for further direction. Across the Atlantic, with little on the macro front this week, comments from several Fed policymakers will moderately influence currency markets going forward. In the Euro zone, a slew of crucial economic releases scheduled this week, especially PMI reports, will offer hints about the strength of the region’s economy.

Pound Sterling – UK Markets

Sterling was broadly higher against the majors on Friday tracking weak global economic cues. While the US Reuters/Michigan consumer sentiment report surprised investors on the downside, speculation continues to persist in currency markets that the ECB might use alternative policy instruments in its meeting scheduled next month, thereby lifting the Pound against both the US Dollar and the Euro. The Rightmove house price index for May released overnight showed that house prices in the UK recorded another sharp rise as demand continued to outstrip supply, thereby raising investors’ concern about a potential bubble in the domestic housing market. Meanwhile, the BoE Governor opined that the central bank is not in a position to deal with the deep structural problems plaguing the housing market. With little in terms of macro releases today, the Pound is trading in a tight range against its major peers. Moving forward, Sterling investors will eye the domestic inflation, retail sales and the revised first quarter GDP reports scheduled this week. Moreover, investors will keep a tab on the BoE minutes scheduled for release later this week to gauge if MPC policymakers’ views are in sync with the Governor’s outlook.

US Dollar – US Markets

The US Dollar began the weekly session on a softer footing, as market participants await cues during the upcoming trading sessions for further direction. Meanwhile, encouraging signals from the housing market managed to pacify concerns surrounding the US economy. Data showed a sharp rise in housing starts and building permits for April, thereby strengthening hopes of a revival in the housing market following the weather induced slowdown witnessed in the first quarter. Market participants are likely to remain watchful ahead of some other housing reports during the course of this week for further clarity. However, the soft preliminary Reuters/Michigan consumer sentiment index for May released on Friday showed that an accelerating inflation might weaken the spending capacity of consumers. Besides, earlier last week, data also showed that retail sales growth almost stalled in April. Although economic releases on Friday had a limited impact on the greenback, the US Dollar managed to hold its ground against the single currency after the St. Louis Fed Chief, James Bullard, indicated that a rate hike in the US could be sooner than expected.

Euro – European Markets

The Euro began today’s session on a firmer footing against the majors. Despite a positive start to the weekly session, speculation remains rife that ECB policymakers might be inclined to adopt easy monetary policy measures in the upcoming policy meeting in June. Reports emerged that the ECB is contemplating to embrace accommodative measures, including slashing deposit rate into negative territory along with measures supporting small and mid-sized companies, in the next month’s monetary policy meeting. Although an ECB policymaker, Jens Weidmann, did not explicitly spell out the future course of policy action, he stated that policymakers will keep a close watch on the Euro's exchange rate before taking policy decisions. Against the backdrop of weaker than expected first quarter growth data from major Euro zone economies, the PMI data scheduled for release in the latter half of this week is likely to attract market interest. However, comments from a couple of ECB policymakers in today’s trading session is likely to set the direction for currency markets, as the ECB’s policy stance next month is likely to have a profound influence on the Euro in the near term.

Other Currencies – Highlights

The New Zealand Dollar has pared most of its early session gains and is trading in a tight range against the US Dollar this morning. Data released over the weekend showed that services sector activity in New Zealand, which accounts for about two thirds of the nation’s economy, rose to the highest level in over six years for April, boosted by a rise in new orders and sales. Additionally, producer prices edged up more than expected for the first quarter of 2014, confirming the rising inflationary pressures in the nation which led the Reserve Bank of New Zealand to raise its benchmark interest rate twice earlier this year. With little of note on the global economic calendar today, investors in the Kiwi Dollar are looking forward to the RBNZ’s inflation expectations report for the second quarter of 2014 scheduled later this week for further direction to risk appetite. Additionally, a slew of global macroeconomic releases in the week ahead will prove crucial for the Kiwi Dollar against the majors.