Euro Crisis Draghis On

The ECB President had upped the ante in the run up to yesterday’s monetary policy meeting but failed to announce any definite measures to tackle the deepening debt crisis, resulting in severe blow to the Euro against the majors. Though Draghi kept hopes of the central bank intervention alive, he transferred the onus on the region’s governments to act first. Today’s US non-farm payrolls data is likely to be pivotal for risk sentiment, as a weaker reading could reignite speculation of QE3. At home, the BoE maintained the status quo at its policy meeting yesterday and is seemingly vindicated by today’s services PMI which has indicated an expansion, though at a slower pace.

Pound Sterling – UK Markets

Sterling recovered sharply against the Euro in yesterday’s trading session, after the ECB stopped short of announcing any concrete action to counter the region’s debt contagion. Meanwhile, on largely expected terms, the BoE left its benchmark interest rate and asset purchase target unchanged, shifting focus to the central bank’s quarterly inflation report next week. Nonetheless, future action from the central bank seems increasingly possible amid dismal growth signs. In today’s trading session, the Pound has moved higher against the US Dollar and is holding well against the Euro. Meanwhile, data just out has revealed that the services PMI dropped marginally for July though is still under expansionary mode. This follows yesterday’s unexpected expansion in the British construction sector activity for July. However, with the domestic economy continuing to face the brunt of the worst recession in more than three decades, the NIESR slashed its 2012 economic growth forecast on the UK. With a light domestic calendar today, markets are likely to keep a close track of the US non-farm payrolls data due later today and is expected to closely influence the risk appetite.

US Dollar – US Markets

Failure to announce any tangible steps to rescue the Eurozone from the mounting debt crisis battered investor confidence and prompted them to seek refuge in the US Dollar. However, an unexpected decline in US factory orders for June has strengthened the case for the Fed to take fresh action. The greenback pared yesterday’s gains against the majors this morning ahead of the non-farm payrolls data for July which is expected to show a relatively small uptick, just enough to keep the unemployment rate stable at 8.2%. Yesterday’s better than expected jobless claims data and the recent upbeat ADP employment report have further strengthened market perception of an improvement in today’s jobs data. Meanwhile, the ISM non-manufacturing composite index for the same period is also due today and is likely to garner little interest.

Euro – European Markets

The Euro witnessed a sharp decline against the majors and plunged below the 1.22 mark against the US Dollar in yesterday’s trading session after the ECB President, Mario Draghi, poured cold water over market optimism as he refrained from announcing concrete plans to curb the region’s debt crisis. The ECB joined its much revered counterparts, the Fed and the BoE, in keeping its monetary policy on hold, with a promise of springing into action when required. Although the ECB President stated that the Euro was "irreversible" and signaled action if required to lower the borrowing costs, Spain and Italy opined that any talk on seeking EU intervention to bring down yields was premature. However, the Euro has reversed its weakness against the US Dollar this morning, despite receiving another jolt in the form of a three notch downgrade of Slovenia’s bond rating by Moody’s. Data released earlier today revealed that the services sector activity in Germany and the Eurozone was revised upwards for July. In absence of any bond auctions, the Eurozone retail sales is the only key economic release on tap today in Europe.

Other Currencies – Highlights

The Kiwi Dollar has strengthened against its major peers this morning after S&P affirmed its credit rating on New Zealand with a “Stable” outlook. Substantiating its stance, the agency indicated that New Zealand has moderate fiscal flexibility, a resilient economy and policy institutions favouring swift and decisive policy reform. On the macro front, the releases for the week signaled a strengthening economy with an uptick in the NBNZ business confidence for July and a rebound in the building permits for June. The forthcoming week features crucial releases such as ANZ consumer confidence index and employment data. For today’s trading session, the New Zealand Dollar is likely to track the resultant risk sentiment following the US non-farm payrolls data for July.