Merkel Soothes Nerves

The German Chancellor, Angela Merkel, infused a new lease of life into the market after she backed the ECB President’s plan to intervene in the region’s bond markets to counter rising borrowing costs, leaving very little dissenting voices against the ECB plan. At home, an improvement in the labour market and a sharp jump in retail sales should prove positive for the next week’s revised second quarter GDP data. Across the Atlantic, yesterday’s weak set of economic releases have reignited hopes that QE3 remains in the offing and has turned focus on to today’s consumer sentiment data.

Pound Sterling – UK Markets

The Pound moved higher against the Euro and the US Dollar in yesterday’s trading session, as better than expected growth in the UK retail sales strengthened hopes that Britain’s recession might not be as deep as feared earlier. Moreover, the Pound also benefitted from reports of buying by an Asian central bank. In a move to provide some relief to traders, the BoE policymaker, Martin Weale, revealed he felt that the nation’s economy is caught up in stagnation rather than recession. However, gains in Sterling against the Euro remained short lived, as weak economic data from the US strengthened belief that fresh easing measures by the Fed remains in the realm of possibility. Sterling has begun today’s trading session on a weaker footing against the majors, as traders stayed cautious ahead of the second quarter GDP and public sector borrowing data scheduled for release next week. With no major domestic macro releases due today, economic releases from the Eurozone and the US are expected to set the direction for the Pound against its major counterparts.

US Dollar – US Markets

The US Dollar slipped against its major peers in yesterday’s session after a fairly weak set of economic indicators in the US revived hopes that the Fed might consider inducing fresh stimulus to aid growth. The number of people claiming jobless benefits climbed unexpectedly last week while the Philadelphia Fed’s manufacturing index reflected the recent weakness shown by the New York Fed’s manufacturing survey. Moreover, housing starts fell more than expected last month. However, building permits, which is seen as a leading indicator, surged for July highlighting the spurt in optimism among home builders. The Minneapolis Fed President, Narayana Kocherlakota, reiterated his hawkish stance by indicating that the central bank might need to raise interest rate sooner than late 2014. Meanwhile, the greenback has strengthened against both the Euro and the Pound this morning. With inflation easing and retail sales showing signs of recovery, markets are expected to closely track today’s Reuters/Michigan consumer sentiment index for more insights on the current state of the US consumer morale.

Euro – European Markets

Investor confidence was boosted and the Euro traded higher against the majors in yesterday’s session after reports indicated that Spain might receive the first tranche of €30 billion of the EU banking bailout as soon as by the end of this week. Moreover, weak US macro data boosted the common currency’s relative strength against the greenback. Additionally, the German Chancellor, Angela Merkel, expressed her desire to hold the Eurozone together and boosted hopes by expressing support to the ECB President, Mario Draghi’s plan for an ECB intervention in the peripheral bond markets. Consequently, markets expect some positive signals from her meeting with the French President and the Greek Prime Minister next week. On the macro front, data released earlier today indicated that the German producer price inflation eased for July. With the Euro trading under pressure against the greenback in today’s session, all eyes are now focused on the trade balance data from the Eurozone and consumer sentiment data from the US for further direction.

Other Currencies – Highlights

The Canadian Dollar has declined against the US Dollar this morning, as traders stayed cautious ahead of today’s consumer price inflation data which is expected to offer more cues over the stance that the Bank of Canada. Data yesterday revealed that manufacturing sales in Canada unexpectedly fell in June, owing to a significant drop in sales of petroleum and coal products. Though Moody's yesterday reaffirmed its “AAA” rating on Canada, it cautioned that the nation’s heavy dependence on crude oil could prove a major drag on the economy, given that crude prices are under pressure. Adding to the woes, the nation’s Finance Minister, Jim Flaherty, earlier stated that the Canadian economy is operating below its potential. Apart from the domestic inflation report, macro data from the US and news flow emanating from the Eurozone are expected to play a crucial role in determining the direction of the Canadian Dollar against the majors.