Sterling Marches Backwards

Although yesterday’s industrial production data in the UK was not as bad as envisaged, the numbers offered little hope that the BoE, in its quarterly inflation report later today, would hold back from slashing its growth forecast. Additionally, the BoE Governor is likely to issue a downbeat assessment of the domestic economy, leaving room for the central bank to adopt monetary easing measures. Across Europe, Germany showed signs of weakness as the nation’s factory orders declined and exports slipped, while S&P lowered its outlook on Greece. Chinese economic releases scheduled for the next two days are likely to be closely monitored for hints on risk sentiment.

Pound Sterling – UK Markets

Sterling recovered against its major peers in yesterday’s trading session after industrial and manufacturing data in the UK surpassed market expectations. However, the numbers did little to alter expectations of the BoE undertaking additional monetary easing measures in the future. The Pound is headed lower against the US Dollar and is trading flat against the Euro today. The quarterly inflation report remains a key event, wherein the central bank is expected to slash its growth and inflation forecasts for 2012 and beyond. Echoing this weak sentiment, the NIESR indicated that the British economy shrank 0.2% for the three months to July. Meanwhile, the BoE Governor, Mervyn King, is anticipated to maintain his dovish stance and might continue to accentuate the impact of the European debt crisis on the UK economy. Today’s events in Britain are expected to play a vital role in charting the direction of the Pound against the majors in the next few trading sessions.

US Dollar – US Markets

In yesterday’s trading session the US Dollar edged lower against the Euro and Sterling, as investors continued to remain hopeful that the ECB might take urgent actions to address the Eurozone’s debt crisis. Moreover, the Boston Fed President, Eric Rosengren, indicated in an interview that the Fed should start buying treasury and mortgage-backed securities until the economy was back to full strength. However, the greenback managed to recover some of its losses against the Euro this morning, as data released earlier today indicated a drop in German exports, highlighting the nation’s vulnerability to the region’s debt crisis. On the macro front, US consumer credit registered its weakest growth in eight months for June, confirming the negativity in consumer morale. With the domestic economic calendar on the light side, Chinese economic releases scheduled for tomorrow are expected to provide direction to market risk appetite.

Euro – European Markets

Although the Italian economy remained mired in recession the Euro traded higher against the major currencies yesterday, as markets seemed to have shrugged off weak economic data on hopes that the ECB might jump in to deal with higher borrowing costs in the peripheral economies. However, the Euro has dipped against the US Dollar in today’s trading session after data revealed that German exports slipped for June. Greece continued to face the brunt of credit downgrades, as S&P lowered the outlook on the nation’s debt rating to “Negative” from “Stable” citing prevailing economic and political concerns. The change reflects the risk of a downgrade if Greece is unable to obtain the next disbursement from the Troika. Meanwhile, the head of the Eurozone finance ministers' group, Jean-Claude Juncker, opined that a Greek departure from the Eurozone would be “manageable”. Following yesterday’s dismal factory orders, today’s industrial production figures would be keenly eyed to assess the extent of ongoing infection from the periphery to the core. Additionally, this would set the stage for German second quarter GDP data scheduled for release next week.

Other Currencies – Highlights

The Swiss Franc declined against its major peers this morning, as data from the State Secretariat for Economic Affairs released earlier today revealed that the nation’s consumer confidence index unexpectedly dropped for the three months to July. Data yesterday indicated that the deflationary trend in the Swiss economy prevails, keeping alive the prospects of the Swiss National Bank intervening in the currency markets. Meanwhile, the Swiss unemployment rate remained steady at 2.7%, in line with market expectations. With no key domestic economic releases on tap this week, markets are expected to closely monitor the macro releases from China for further direction on the Swiss Franc against the majors. News flow from the Eurozone will also remain a key focus.