UK Manufacturing Grinds to a Halt

The CBI’s latest industrial trend survey, released yesterday, further vindicated the feeling that weakness in the UK manufacturing sector was no longer a temporary phenomenon. Moreover, a surprise spurt in the government’s borrowing, excluding intervention for July, has jeopardised the chances of Britain maintaining its top notch credit rating. Today’s meeting between the Luxemburg Prime Minister, Jean-Claude Juncker and the Greek Prime Minister, Antonis Samaras, is expected to kick off a series of meetings between the region’s leaders for tackling the debt crisis. Meanwhile, the minutes of the Fed’s latest policy meeting, due later today, is expected to set the stage for the central bank’s annual symposium at Jackson Hole next week.

Pound Sterling – UK Markets

The Pound weakened against the Euro in yesterday’s trading session following disappointing UK economic releases. The CBI’s latest industrial trend survey revealed a sharp fall in order books, as Britain's manufacturers scaled back plans to boost output owing to a weak domestic situation and a tougher climate for exports. Moreover government borrowings, excluding interventions, unexpectedly climbed on account of a shortfall in corporation tax revenues and higher spending. The data highlights that the British government has veered further off-track from its austerity programme and has thus raised speculation of a potential UK credit rating downgrade. However, Sterling managed to cling on to its gains against the greenback yesterday, as traders shunned the US Dollar ahead of today’s FOMC minutes for the latest monetary policy meeting. In the absence of major domestic macro data today, the Pound is trading almost flat against the Euro and the US Dollar. Markets are expected to closely monitor today’s economic data from the US and the Chinese HSBC manufacturing PMI data early tomorrow for further direction.

US Dollar – US Markets

Yesterday, the US Dollar retreated against its major peers amid higher risk appetite among investors following a positive response to the Spanish bond auction. Additionally, markets remain hopeful of some positive news from the Luxembourg Prime Minister, Jean-Claude Juncker’s visit to Greece today. However, the greenback is trading almost unchanged against both the Euro and the Pound this morning, as traders stayed cautious ahead of the minutes for the latest Federal Reserve’s monetary policy meeting, which is expected to offer hints over the stance that the central bank might adopt in its next monetary policy meeting. Moreover, guesswork over the timing of QE3 is becoming more difficult by the day after the Atlanta Fed President, Dennis Lockhart, indicated that he had not yet made up his mind whether further monetary easing is warranted. Apart from the FOMC minutes, markets will be keeping a close eye on existing home sales data from the US to monitor if the latest revival in the housing market remains intact.

Euro – European Markets

The Euro posted decent gains against both the US Dollar and Sterling yesterday, as optimism of an ECB intervention triggered a decline in Spanish bond yields at an auction. Moreover, reports continued to strengthen perception that the ECB might take measures to help peripheral nations reduce their high public debts. In today’s trading session, the Euro has continued to trade well above the 1.24 mark against the US Dollar, as traders remain hopeful that meetings between European leaders during this week could result in a positive shift in the Eurozone’s strategy to deal with Greece’s challenges. This sentiment was echoed by a senior lawmaker with Angela Merkel’s party, who stated that concessions are possible for Greece so long as the nation shows willingness to abide to the main targets set out in the country’s bailout program. The Eurogroup Chief Jean-Claude Juncker’s visit to Greece is expected to provide the first insights into the plan for dealing with the Greek fiscal problems. Apart from the news flow from the Eurozone, market participants are expected to read into the FOMC minutes due later today and prepare for tomorrow’s PMI readings from the major European nations.

Other Currencies – Highlights

The Japanese Yen has continued yesterday’s downtrend against the majors this morning after Japan swung to a trade deficit for July, owing to a sharp slowdown in exports and faltering global growth. This has raised serious questions about the underlying scenario of the export driven economy. Moreover, data indicated that supermarket sales in Japan continued to decline for July. During the week, markets are expected to closely look into the monthly report from the Japanese Cabinet Office and the BoJ Governor’s press conference for further cues on the domestic front. Additionally, meetings in the Eurozone and other global economic releases over the next two days are expected to provide further direction to market risk appetite.