Mario takes on Bundesbank

Italy is expected to clear the bond auction hurdle today, as news flow from the Eurozone suggested that the ECB would undertake measures to support the peripheral bond markets. The ECB Chief’s determined effort to tackle the region’s debt crisis was evident from his comments yesterday, wherein he countered dissenting voices from the Bundesbank. The upward revision to the US second quarter GDP and upbeat pending home sales data continued to erode hopes of QE3, but traders eagerly await the Fed Chairman’s statement tomorrow for a clearer picture on future course of action. Back at home, the housing sector breathed a sigh of relief as data confirmed a recovery in mortgage approvals.

Pound Sterling – UK Markets

The Pound advanced against the Euro in yesterday’s trading session amid worries over Spain’s fiscal situation. However, it has weakened against the common currency this morning on speculation that Italy would comfortably clear its 10 year bond auction hurdle later today. Meanwhile, Sterling is trading flat against the greenback in today’s trading session on account of uncertainty over the US Fed Chairman, Ben Bernanke’s speech at Jackson Hole tomorrow. Data just released has indicated an increase in mortgage approvals for July, confirming the recovery highlighted by data from BBA. Among other releases from the UK, data revealed that the annual M4 money supply declined at a slower pace, reflecting that the central bank’s asset purchase program is gaining traction. Meanwhile, a survey revealed that public expectations for inflation over the year ahead rose for August, highlighting the recent spurt in food and energy prices. With most domestic economic data already out in today’s session, market participants await the GfK consumer confidence data later today, which is likely to show an improvement.

US Dollar – US Markets

The greenback garnered some strength against the Euro in yesterday’s session, as positive economic releases from the US prompted traders to tone down their hopes of fresh stimulus from the Fed in next month’s monetary policy meeting. Along expected lines, the GDP data for the second quarter was revised upwards, while US pending home sales climbed to the highest level since April 2010. However, risk appetite among market participants has received a boost this morning, as traders remain optimistic about the outcome of today’s bond auctions in Italy and has prompted moves towards the Euro. On the macro front, today’s consumer spending data is likely to show an improvement for July, further hampering the prospects of QE3. Apart from today’s personal consumption data, markets are also expected to keep an eye on jobless claims figures and Kansas manufacturing index for further insights on the economic front. With recent economic indicators in the US keeping the possibility of QE3 finely balanced, traders are positioning themselves for the Fed Chairman’s speech in Jackson Hole tomorrow.

Euro – European Markets

Yesterday, the Euro slipped against its major peers after Catalonia became the third region, after Valencia and Murcia, to officially solicit aid from the central government. However, losses were limited after the ECB President, Mario Draghi, rebuffed Bundesbank’s criticism of his plan to intervene in bond markets. Meanwhile, the German Chancellor and the Italian Prime Minister failed to find common ground on details to enable the ECB’s goal of countering the region’s debt problems, but both assured that they are making headway towards finding a solution. The Euro has begun today’s trading session on a firm footing against its major counterparts, as markets expect a positive response to the Italian 10 year bond auctions later today, following a sharp fall in borrowing costs at its short term auctions earlier this week. Moreover, reports quoted the Chinese Premier, Wen Jiabao, indicating that China would continue to buy EU government bonds after fully assessing its risks. Data released earlier today showed that the German labour market remained relatively immune to the region’s crisis, as unemployment rates remained stable for August. The Eurozone confidence indices due later today are expected to garner modest market attention.

Other Currencies – Highlights

The Kiwi Dollar has pared losses versus its major peers in today’s trading session on the back of positive economic data. Data revealed that building permits in New Zealand continued to climb, as new apartments consented for July stood at its highest level since May 2009. Moreover, the economic outlook for New Zealand remained positive, as a net 20% of respondents to the National Bank's business outlook survey expect business conditions to improve over the next 12 months, compared to a net 15% in July. With no major domestic economic releases scheduled during the week, the Kiwi Dollar is expected to track overseas cues for further direction. The consumer spending and jobless claims data from the US later today are expected to provide further insights over the possibility of QE3 in the near future. Moreover, traders are expected to closely monitor the US Fed Chairman, Ben Bernanke’s speech and the Chinese official PMI later this week, for further direction to the Kiwi Dollar against the majors.