This week, several central bank commentaries have suggested that they are considering taking necessary steps to support their respective economies. In the UK, Ian McCafferty, who has until recently been a lone voter for a rate rise, yesterday stated that he dropped his call for an interest rate increase as inflationary pressures in the nation have receded. Also, yesterday, the European Central Bank (ECB) President indicated that the bank is set to ease policy in March. 

Today the focus has turned to economic news, with the release of UK inflation data which indicated that the headline inflation rate for January ticked higher, while core CPI missed estimates. Later, the ZEW German confidence index and US NAHB housing data will attract some market attention.

Pound Sterling – UK Markets

Yesterday, Sterling turned lower against the US Dollar after the Bank of England (BoE) policymaker, Ian McCafferty, revealed that he withdrew his vote for an interest rate rise earlier this month, on the observation that UK inflationary pressures have receded in the recent months. His comments weighed on the Pound as it showed a shift in the Fed board member’s thinking. He also added that Sterling this week will be further affected by a two-day European Union (EU) summit starting on Thursday, when the UK Prime Minister, David Cameron, will try to finalise a deal to keep Britain in the EU. 

The Pound sharply recovered from its losses against the greenback earlier today. On the macro front, the just out UK inflation numbers showed that the headline inflation rate edged up to its highest level in January, in line with market estimates. January’s rise in consumer prices was driven by motor fuels, food and clothing. Meanwhile, the monthly CPI number was lower than expected for a myriad of reasons, including a reduction in air fares, which had boosted the December number. The core CPI also eased in January. 

US Dollar – US Markets

The greenback is trading on a weaker footing against the major currencies this morning. US economic news for this week will pick up pace today, starting with the New York Fed manufacturing index and followed by sentiment figures for the home building industry. Recent numbers relating to the US manufacturing industry have indicated persistent weakness in the sector. Today’s release from the Empire state will offer an early indication of the February numbers, amid expectations of a moderately lesser degree of decline. In separate data, the National Association of Home Builders' housing market index for February is estimated to remain unchanged from the previous month, indicating modest and steady growth in the US housing market. Going forward, US building permits and housing starts data, scheduled for release tomorrow, will provide further evidence about the health of the nation’s residential market in the New Year. 

As well as data releases, the minutes of the Fed’s January policy meeting will be published tomorrow. Market participants will try to decipher the future direction of interest rates from the FOMC’s discussion.

Euro – European Markets

The shared currency is trading mixed against the Pound and the US Dollar this morning ahead of the German ZEW survey on the nation’s economic conditions. The New Year has begun on a downbeat note due to the extreme volatility in equity markets, weak manufacturing PMI readings and weaker than expected economic data. Markets anticipate that these factors could weigh on today’s early round of February ZEW survey numbers of Germany, for both the current and predicted data. Additionally, the ZEW economic sentiment index in the Euro zone is expected to drop for a second straight month, adding support for significant moves from the European Central Bank (ECB). A greater than expected deterioration in today’s sentiment indicators could push the ECB to provide liquidity support as early as tomorrow’s non-policy meeting.

The Euro dragged lower against the majors yesterday, after the ECB President, Mario Draghi, hinted that the central bank will not hesitate to expand its monetary easing programme in the next month.

Other Currencies – Highlights

The Australian Dollar rallied against the US Dollar today following the release of the minutes of the Reserve Bank of Australia’s (RBA) recent monetary policy meeting when the central bank left its benchmark interest rate unchanged at 2.00%. The minutes showed that the RBA was content with the positive economic developments in the Australian economy, pushing the Aussie Dollar higher against the majors. In the minutes, the RBA Governor reiterated that a weak currency has improved the firm’s competitiveness and consumer spending and house building remains supported by record-low interest rates. However, the minutes indicated that policymakers remain watchful of the unrest in global markets and are flexible to cut interest rates further if the situation demands. Apart from optimistic comments by the RBA, a slightly improved global market sentiment and rising crude oil prices have also boosted the Aussie Dollar against the greenback.

Later in the week, investors will eye Australia’s labour data and a speech by RBA Assistant Governor for further direction to trading in the currency pair.