Following recent comments from the ECB Chief and with more Fed policymakers urging for a fresh set of measures to revive the economy, markets remain hopeful that central bankers across both sides of the Atlantic might pursue monetary policy actions to combat the economic slowdown. Slowing global growth had a “knock-on” effect on the Japanese economy with its second quarter economic growth slowing sharply. Against this backdrop, economic releases from the US and GDP data from the Eurozone look set to dominate near-term market dynamics.
With the UK economy showing no major signs of a revival, economic indicators pertaining to labour market and retail sales will be keenly tracked this week.
Pound Sterling – UK Markets
On Friday, Sterling strengthened against the US Dollar and the Euro amid optimism that the Bank of England might refrain from lowering benchmark interest rate in the near term. Meanwhile, factory gate inflation eased to the lowest level in nearly three years for July, indicating that price pressures in Britain are easing.
However, the Pound has weakened against the US Dollar and is trading flat against the Euro this morning, as traders stay cautious ahead of the key set of economic releases from the UK during the course of the week. The consumer price inflation numbers due tomorrow is expected to reveal signs of easing pressure on household finances, with the nation’s inflation expected to edge closer to the BoE’s target rate. Meanwhile, retail sales in Britain are expected to grow at a steady pace for July on back of easing price pressures and the Olympics. On the labour market front, data is likely to indicate that the number of people claiming jobless benefits rose for July.
In the midst of the prevalent weakness in UK’s economic growth, the minutes of the BoE’s latest monetary policy meeting due later this week is likely to be keenly awaited.
US Dollar – US Markets
The US Dollar has begun the week on a firmer footing against both the Pound and the Euro as weak growth numbers for the second quarter from Japan, saw investors turn to the safe haven currency.
However, gains remain capped, as market participants remain watchful ahead of crucial US economic releases scheduled during the week which are expected to offer cues on whether the Fed would embark upon further monetary stimulus to support the economy. On Friday, the President of the Federal Reserve Bank of San Francisco voiced his support for QE3.
Although regional manufacturing indicators would be closely monitored for signs of revival, the prime focus remains on retail sales, CPI and consumer sentiment data, given their strong influence on the central bank’s monetary policy decision. With no domestic macro data today, the outcome of the Italian bond auctions is expected be a key determinant for risk appetite among market participants.
Euro – European Markets
The Euro is trading marginally lower against the US Dollar in today’s trading session ahead of key GDP releases from the Eurozone scheduled tomorrow. Moreover, the recent optimism over the ECB intervening in bond markets took a hit after the ECB Governing Council member, Luc Coene, opined that bond purchases by the ECB would not solve the difficulties of Spain and Italy in maintaining investor confidence.
The Italian bond auctions today is expected to be closely monitored, as the Italian Finance Minister, Vittorio Grilli, indicated that the nation would overshoot its 2012 deficit goal but added that Italy was on course to meet its EU obligations.
On the macro front, data indicated that the French current account deficit widened more than expected for June while the German wholesale price index climbed for July. With no further economic releases scheduled today, the Italian bond auctions later today and tomorrow’s GDP data will remain the key driver for charting the direction of the Euro against the majors.
Other Currencies – Highlights
The Japanese Yen is trading higher against its major peers this morning, as investors preferred to seek shelter in safe haven currencies ahead of the Eurozone GDP data due tomorrow which is expected to indicate that the region’s economic growth contracted for the second quarter. Additionally, market participants expect the German and the French GDP data to be on the softer side.
Meanwhile, growing risk aversion prompted traders to shun the weak GDP data from Japan released earlier today. Data revealed that Japan’s sequential economic growth eased sharply to 0.3% for the second quarter from 1.3% posted for the previous quarter. In today’s trading session, the minutes of the BoJ’s latest monetary policy meeting and the index gauging the performance of Japan’s tertiary industry are other releases likely to be keenly tracked.