Merkel Provides Respite

In the UK, the spate of poor economic data showed no signs of abating, as data just out today indicated a decline in industrial production and a slowdown in the BRC’s retail sales growth. In the midst of the continued economic weakness, the BoE is expected slash its growth forecast in its inflation report due tomorrow. In Europe, Germany has softened its stance on ECB bond buying, as reports indicated that Angela Merkel’s government has backed the proposals, paving way for the central bank to play a bigger role. With a light economic calendar in the UK and the US today, traders are likely to remain focused on news flow from Europe.

Pound Sterling – UK Markets

The Pound moved higher against the US Dollar in yesterday’s trading session, as risk appetite received a boost after the German Chancellor, Angela Merkel’s government backed the ECB’s bond buying plan. However, easing concerns over the Eurozone debt crisis led Sterling to register declines against the Euro. In today’s trading session, Sterling has declined against Euro following the latest string of poor economic data from the UK. Data just released has indicated that UK industrial production for June continued its downward trend, reflecting weakness in the manufacturing sector. Moreover, consumer morale remains weak as the BRC revealed that the like-for-like retail sales growth in the UK slowed for July. On the macro front, market players await the NIESR GDP estimate for July scheduled later today for hints on the overall economic landscape. Additionally, traders remain jittery ahead of the BoE's quarterly inflation report due tomorrow, wherein the central bank is expected to slash its growth and inflation forecast, thereby opening doors for more QE or an interest rate cut.

US Dollar – US Markets

The US Dollar retreated against both the Pound and the Euro in yesterday’s trading session on expectations that the ECB might come up with measures to tackle the region’s debt crisis after the German Chancellor, Angela Merkel’s government offered support to the ECB’s bond buying plan. In today’s session, the greenback has continued to move higher against the Euro ahead of data due for release later today which is expected to confirm that the Italian economy continued to languish in recession while the German factory orders declined. Meanwhile, the Fed Chairman, Ben Bernanke, maintained his dovish stance as he stated that households in the US continue to struggle with difficult economic and financial conditions. Against this backdrop, today’s consumer credit data is expected to shed some light over the nation’s consumer spending pattern.

Euro – European Markets

The Euro posted decent gains against the US Dollar in yesterday’s trading session after reports indicated that the German Chancellor, Angela Merkel’s government has approved the ECB’s plan to intervene in the Spanish and the Italian bond markets. Meanwhile, the Italian Prime Minister, Mario Monti, also called for more urgency in efforts to lower borrowing costs. The recent comments from the key European leaders have sparked speculation that the ECB intervention in bond markets remain in the offing. Additionally, signs of Greece moving towards an agreement with its international creditors emerged, as Greece and its international creditors agreed on the need to strengthen policy efforts to support the economy and comply with its bailout terms. The common currency has continued its upward trend against the US Dollar this morning as market participants keenly await the Italian GDP and the German factory orders data slated for release later today. These macro releases are likely to prove critical for the movement in the Euro against the majors in today’s trading session and should provide some food for thought for the ECB.

Other Currencies – Highlights

The Australian Dollar has edged higher against the greenback and the Euro this morning after the Reserve Bank of Australia (RBA) left its benchmark interest rate unchanged at 3.5%, in line with market expectations. Moreover, the central bank in its policy statement offered some upbeat remarks on China and gave no hints on easing its monetary stance. Additionally, the Aussie Dollar benefited from the “risk on” sentiment among traders, as the German government accepted the ECB’s plan to intervene in bond markets. News flow emanating from Europe is likely to be keenly tracked in today’s trading session and might prove critical for the risk sentiment. Moreover, key macro releases scheduled during the course of the week, including a raft of Chinese economic data and the Australian employment numbers, are expected to play a major role in setting the trend for the Australian Dollar against its counterparts.