All Eyes on Fed Today

With the Fed set to deliver its interest rate decision today, most traders expect the central bank to stay put on the QE front, while extending its commitment to retain low interest rates until 2015. However, a dovish tone in its policy statement could trigger a wave of optimism on belief that the Fed is moving closer to embracing a fresh round of stimulus. The confirmation of contraction in manufacturing activity and elevated levels of unemployment in the Eurozone has strengthened calls that the ECB might also take decisive measures at tomorrow’s meeting. At home, data continues to reveal Britain’s susceptibility to weakness emerging from the Eurozone, as its manufacturing PMI continued to contract for July.

Pound Sterling – UK Markets

Sterling weakened against the Euro in yesterday’s trading session on hopes that the ECB might take key measures to combat the region’s debt crisis. Meanwhile, the Pound is hovering close to yesterday’s lows against the Euro and the US Dollar this morning, as data from Nationwide released earlier today revealed that British house prices fell last month at their fastest annual pace in nearly three years. Moreover, data just out revealed that manufacturing activity in Britain continued to contract for July, triggering worries that the British economy may fail to stage a recovery in the second half of 2012. With recent economic data showing weakness in the British retail sector, the BRC’s shop price inflation data out early this morning indicated a marginal easing for July. Adding further to the gloom, the OECD has indicated that the UK economy is likely to continue to shrink in 2012. With a light domestic economic calendar, the US Fed’s interest rate decision scheduled later today is expected to set the trend for high yield currencies.

US Dollar – US Markets

The US Dollar is trading flat against its major peers in today’s trading session on account of looming uncertainty over the stance that the Fed might adopt in its monetary policy meeting today. Meanwhile, risk appetite among market participants remains subdued this morning after data indicated that Chinese manufacturing activity deteriorated for July, despite easing measures undertaken by the nation’s central bank. Yesterday’s economic releases in the US were broadly positive, thereby denting hopes that the Fed would resort to a fresh round of QE. The domestic consumption story has shown signs of recovery, as consumer confidence unexpectedly jumped for July. Although market participants expect the Fed to avoid altering its monetary policy stance today, there is growing optimism that the central bank might lay the groundwork for further bond purchases in a bid to revive the economy. Apart from the central bank’s decision, the ISM data will be closely watched to examine the trend in the manufacturing sector. Additionally, ADP’s employment data is expected to set the stage for non-farm payrolls data due later this week.

Euro – European Markets

The Euro toppled the key 1.23 level against the US Dollar in today’s session on growing optimism that the ECB might deliver key measures to tackle the region’s debt crisis in its monetary policy meeting tomorrow. However, gains remain muted on the back of an unexpected drop in the official Chinese manufacturing PMI for July. Additionally, data earlier today indicated that manufacturing activity in the Eurozone continued to contract. Meanwhile, the Italian Prime Minister and the French President echoed the ECB President’s latest comments by indicating that the two countries are “determined” to take all essential measures to protect the integrity of the Eurozone. However, German apprehension was evident, as the nation’s finance ministry reiterated its view that there was no need to grant a banking license to the Eurozone's new bailout fund. Among macro releases yesterday, inflationary worries remained on the backburner while unemployment remained at higher levels. Today’s monetary policy decision by the Fed and the build up to tomorrow’s ECB meeting is expected to determine the direction in the Euro against the majors.

Other Currencies – Highlights

The Canadian Dollar has edged higher against most of its major peers on hopes that the US Fed policy makers would initiate the groundwork for a fresh round of stimulus, while the recent statement from the ECB has spurred hopes that the central bank might take additional measures to tackle the region’s debt crisis. Hopes of the Bank of Canada raising its benchmark interest rate in the near future faded, as data yesterday revealed that Canadian GDP grew at a meagre pace of 0.1% for May, compared to 0.3% growth recorded in the previous month. The downbeat GDP data has elevated the chances of Canada's second-quarter GDP falling marginally below the central bank’s forecast of a 1.8% expansion. In the absence of any major economic releases for the week, the Canadian Dollar is expected to closely follow the central bank monetary policy meetings on both sides of the Atlantic for further direction.