Today’s inflation report has shown that consumer price growth in the UK fell below the 1% mark, mandating the BoE Chief to write a public letter to the British Chancellor to explain the current divergence in the nation’s inflation from the central bank’s target rate. However, with the core inflation reading in the UK showing signs of resilience, traders remained optimistic that domestic wages continued to grow.

Across the Atlantic, today’s NFIB survey will be eyed to gauge the health of activity among small firms, particularly considering the key role of these firms in keeping the nation’s economic growth supported of late. Euro investors will eye the European Court of Justice’s non-binding opinion on Outright Monetary Transactions tomorrow which could have a significant impact on the ECB’s plans to implement QE.

Pound Sterling – UK Markets

Data just out revealed that Britain’s inflation rate dropped below the 1% mark for December as the recent drop in global crude oil prices continued to weigh on domestic price growth. Following today’s downbeat data, the BoE Governor, Mark Carney, will have to write a public letter to the UK Chancellor, George Osborne, detailing why growth in consumer prices has fallen so far below the central bank’s 2% target. The Pound has lost ground against the majors this morning following the release of today’s data which showed a more than expected drop in Britain’s consumer price inflation. Meanwhile, the core measure of today’s inflation reading showed an upswing last month. This has stoked hopes among investors that an uptrend in domestic wages coupled with stronger spending led by lower energy prices is likely to keep Britain’s economy resilient to headwinds from Europe.

In yesterday’s trading session, Sterling reversed its early session losses against the greenback, despite a US FOMC member hinting that the Fed is likely to raise its interest rates by mid-2015.

US Dollar – US Markets

The greenback is trading in a tight range against the majors this morning ahead of NFIB’s small business optimism data scheduled in the US today. This survey is anticipated to show an improvement in morale among small firms for December, especially after the recent ADP’s private sector employment gauge showed that hiring pace among small businesses in the US remained robust last month. Going forward, market participants will keep a tab on tomorrow’s crucial US retail sales reading which is expected to remain flat for December, amid a moderation in auto sales and a drop in energy prices. However, prospects of an upside in tomorrow’s reading cannot be ruled out as low gasoline prices would boost disposable income of consumers.

Yesterday, the US Dollar pared its early session gains against the majors, despite the Atlanta’s Fed President, Dennis Lockhart, resorting to a hawkish tone in his speech yesterday. He indicated that the Fed is anticipated to raise interest rates by mid-2015 as the robust pace of economic recovery in the US is likely to continue through 2015.

Euro – European Markets

Data just out showed that December’s wholesale prices in Germany declined at the strongest pace in fourteen months. Considering that demand in Europe’s largest economy is showing no signs of a pick up, the sharp downtrend in global oil prices continues to strengthen prospects of deflation. Going forward, traders will eye the release tomorrow of the seasonally adjusted industrial production report which is expected to show an increase in the region’s industrial activity for November. Additionally, Euro investors will keep tabs on the European Court of Justice’s (ECJ) statement tomorrow about the legal status of the ECB’s Outright Monetary Transaction (OMT) plans. Although tomorrow’s opinion will be non-binding on the ECB, an unfavourable signal by the ECJ is likely to stoke concerns regarding the effectiveness of the central bank’s plans to purchase government bonds.

The Euro lost ground against the Pound yesterday after the ECB’s Governing Council member, Ewald Nowotny, hinted that the central bank should ease its policy stance as soon as possible to stave off a deflationary spiral in the Euro bloc.

Other Currencies – Highlights

The Japanese Yen gained ground against the US Dollar in yesterday’s trading session after data released in Japan showed that current account surplus in the nation narrowed less than expected for November. This was a fifth straight monthly surplus in Japan, as a weak Japanese Yen continued to boost the value of investment income from abroad. Additionally, a report released earlier today showed that the eco watchers' current index in Japan improved more than expected for December. The report upgraded Japan’s economic outlook and boosted investors’ sentiment, particularly considering that this outlook gauge has been deteriorating since the past seven months.

With little on the domestic macroeconomic front, the Japanese Yen is likely to take direction from the NFIB small business optimism survey scheduled later today in the US. Going forward, tomorrow’s retail sales and Friday’s consumer price inflation data in the US is anticipated to keep investors on their toes.