Draghi’s Words Put to Test

Markets anxiously await policy actions from the ECB President as he backs his vow “to do whatever it takes to protect the Euro” at the monetary policy meeting today. Key measures playing on the minds of the policymakers include the reactivating of the ECB’s bond buying programme. Markets are also eyeing the ECB’s stance on providing a banking licence to the Eurozone bailout fund. Meanwhile, the Fed refrained from providing hints on QE3 yesterday and led high yield currencies lower. However, it has left the door ajar by indicating that further economic weakness would be countered by fresh stimulus. At home, the BoE is expected to follow suit today by leaving its monetary stance unchanged.

Pound Sterling – UK Markets

In yesterday’s trading session, hopes of a domestic economic recovery received a severe blow after data indicated that the manufacturing sector in the UK shrank at its fastest pace in three years and led Sterling to weaken against its major counterparts. The Pound continues to trade under pressure against the Euro this morning, amid optimism ahead of the ECB’s monetary policy meeting due later today. Meanwhile, data just released has indicated that construction sector activity in the UK unexpectedly expanded for July in the build up to the London Olympics. Although the BoE is widely expected to leave its interest rate and asset purchase target unchanged at current levels in today’s monetary policy meeting, a raft of recent weak economic data have increased the possibility of further easing measures in the coming months. With the outcome of the ECB meeting likely to overshadow the monetary stance of the BoE, Sterling is unlikely to have any independent moves but would be closely influenced by the risk appetite prevalent following the ECB meeting.

US Dollar – US Markets

The US Dollar registered sharp gains against its major counterparts yesterday, as the Fed refrained from providing a monetary boost to revive the nation’s ailing economy. However, the prospects for a fresh round of easing remains alive, as the FOMC reiterated that the central bank would pump in fresh stimulus, if necessary. On the macro front, the manufacturing sector continued to show signs of weakness, as the ISM manufacturing activity unexpectedly contracted for July. In today’s trading session, the US Dollar has edged lower against the Euro, as markets expect the ECB to come up with key resolutions in its monetary policy meeting to quell the region’s debt crisis. Market hopes of a positive non-farm payrolls data which is slated on Friday grew, as the ADP employment report released yesterday revealed that the private sector hired more than 150,000 workers for the second consecutive month, quite contrary to the official jobs report. Against this backdrop, traders are expected to pay modest attention to today’s jobless claims data to gain more insights on the labour market.

Euro – European Markets

The Euro has strengthened against both the US Dollar and Sterling in today’s trading session, riding high on hopes that the ECB would come up with measures to arrest the recent spike in Spanish and Italian bond yields. Moreover, in contrast to Moody’s latest warning, S&P affirmed Germany's “AAA” credit rating and maintained a “Stable” outlook. Additionally, reports indicated that Greek political leaders have agreed to €11.5 billion worth of budget cuts, paving way for a deal with Troika officials. However, Cyprus bore the brunt of the region’s debt crisis, as S&P downgraded the nation’s debt rating by two levels to junk territory owing to its banking system's large exposure to Greece. With the ECB’s decision being the key focus, markets are expected to be glued to the ECB President, Mario Draghi’s press conference later today which is expected to outline the central bank’s plan on dealing with the region’s debt crisis. Additionally, Spain prepares to auction bonds today for the first time since the ECB President pledged to do “whatever it takes” to defend the Euro and is likely to be well received among market participants.

Other Currencies – Highlights

In today’s trading session, the Australian Dollar has moved higher against the US Dollar and Sterling after data revealed that the nation’s retail sales grew more than expected for June. Despite weakness in the Chinese economy, data earlier today revealed that Australia unexpectedly posted a merchandise trade surplus for June, providing further boost to the Aussie Dollar. With the recent economic data showing signs of resilience in the Australian economy, the prospects of the central bank lowering its interest rate in the near future has dampened significantly. On the macro front, AIG’s performance of service index remains a key indicator to watch out for during today’s session. Additionally, the movement in the Aussie Dollar is expected to be closely influenced by the ECB monetary policy decision due later today.