Spain Totters at the Cliff’s Edge

The positive response to yesterday’s Spanish and Italian bond auctions offered some respite to high yield currencies. However, Spain is still in a precarious position, as reports emerged that the Catalonia region may seek assistance from the government. Across the Atlantic, uncertainty over the Fed’s stance at its September policy meeting continues to intensify, as economic indicators released yesterday offered mixed signals. Today’s GDP data and the Beige Book survey will be closely eyed for clearer signals on the economic front. At home, Sterling is unlikely to have independent moves and is expected to take cues from Eurozone and US news flow.

Pound Sterling – UK Markets

The Pound managed to hold above the 1.58 mark in yesterday’s trading session, as a sharp fall in US consumer confidence revived hopes that the Fed might resort to fresh easing measures. However, sterling retreated against the Euro following a positive response to the Spanish and Italian bond auctions yesterday. Earlier in the week, data revealed that the UK’s housing market continued to face the brunt of weak mortgage loan figures, while a CBI survey revealed that Britain's dominant service sector shrank between June and August. With the latest set of economic indicators suggesting that the recovery from recession would continue to be long and tedious, markets are expected to keep a close watch on the BoE’s monetary policy meeting scheduled next week, especially after the central bank’s MPC member, Martin Weale, opined that he would choose an interest rate cut over more asset purchases. With Sterling trading almost flat against its major peers and a light domestic economic calendar ahead, macro releases from the Eurozone and the US are expected to hold significance in today’s trading session.

US Dollar – US Markets

In yesterday’s trading session, the US Dollar declined against the Euro following an upbeat response to the Spanish and Italian bond auctions. Additionally, data from the Conference Board revealed an unexpected drop in US consumer confidence for August. Moreover, Fitch has cast doubts over the AAA rating of the US economy on concerns that massive spending cuts and tax hikes due next year could aggravate economic woes. However, the housing sector continued to remain the bright spot of the economy, as the S&P/Case-Shiller home price index registered its first annual increase since June 2010. In the build up to the US Fed President, Ben Bernanke’s speech at Jackson Hole on Friday, the Dallas Fed President expressed his opposition to more monetary easing. The greenback has strengthened marginally against the majors this morning ahead of the domestic GDP data for the second quarter, which is expected to be revised upwards. Markets are also expected to closely track pending home sales and the Fed’s Beige Book survey for further cues on the economic front.

Euro – European Markets

The Euro toppled the 1.25 mark against the US Dollar in yesterday’s session after both Italy and Spain saw their borrowing costs drop at bond auctions, an encouraging sign for Italy’s short term bond auction today and longer dated bond sale due tomorrow. Meanwhile, news emerged that the ECB President, Mario Draghi, would skip the annual conference of central bankers in Jackson Hole ahead of the pivotal ECB meeting. However, worries surrounding Spain escalated, as data confirmed that the nation remained mired in a recession for the second quarter and after Catalonia sought financial assistance from the government in order to meet its financing needs. Against the backdrop of growing speculation of a Spanish bailout the European Union President, Herman Van Rompuy, indicated that the region’s rescue fund is ready for rapid action to aid Spanish banks. The common currency has taken a breather and given up some of its gains against the US Dollar and Sterling in today’s trading session. Meanwhile, German consumer price inflation data due later today holds relevance ahead of next week’s ECB monetary policy meeting.

Other Currencies – Highlights

The Aussie Dollar has declined against the greenback this morning after data revealed that construction work completed in Australia fell for the second quarter. Moreover, markets expect building approvals data due tomorrow to show a steep fall for July. Weak economic data from China also weighed on the appeal of the Australian Dollar. Data earlier this week revealed that profits at Chinese industrial firms declined for a fourth straight month for July. Additionally, the outlook for the Chinese economy remains bleak, as data indicated that China’s leading index fell for July. In today’s trading session, market participants are expected to closely follow economic data from the Eurozone and the US for further direction on risk appetite. On the domestic front, apart from building approvals data, traders are expected to keep a watch on business investment figures scheduled for release tomorrow.