The Mervyn–Mario Show

The major catalyst for markets today is undoubtedly the much awaited monetary policy stance of the BoE and the ECB, wherein the central bankers are expected to provide further boosts to their ailing economies. While a £25 billion-£50 billion increase in asset purchases by the BoE and a 25 basis points rate cut by the ECB seems to be priced in, any surprises on this front could lead to potential moves in both the Pound and the Euro. Across the Atlantic, some numbers on the jobs front later today are likely to keep traders busy ahead of the all important non-farm payrolls report scheduled tomorrow.

Pound Sterling – UK Markets

Yesterday’s trading session saw investors shunning the Pound against the US Dollar, as data indicated that Britain’s dominant service sector activity for June grew at a weak pace. This follows the dismal manufacturing and construction data released earlier this week. However, sterling was relatively unchanged against the Euro. This morning the Pound is trading marginally lower against the US Dollar and is holding well against the Euro, ahead of the BoE’s monetary policy meeting wherein the central bank is widely expected to expand its asset purchases in the range of £25 billion to £50 billion. The minutes of the last monetary policy meeting, indicating a 4-5 split in favour of further QE, provides ample hints over the measures that may be undertaken at today’s meeting. Meanwhile, data released earlier today indicated that Halifax house prices unexpectedly climbed for June. With a £25 billion-£50 billion expansion in QE seemingly priced in sterling, any deviation from this figure might prove to be a catalyst for the Pound against the majors today.

US Dollar – US Markets

In the absence of domestic economic releases in yesterday’s trading session, the US Dollar capitalised on its safe haven appeal and strengthened against the majors amid global economic woes. The Dollar has seen further marginal gains against the majors today as traders await the outcome of the BoE and the ECB monetary policy meeting. On the macro front, initial jobless claims and ADP employment numbers are set to garner increased attention for hints about labour market conditions in the US. These releases become all the more important ahead of the crucial non-farm payrolls report scheduled tomorrow. Meanwhile, the ISM non-manufacturing index due later today is expected to indicate a slower pace of growth in the US services sector for June. For the current trading session, the movement in the greenback is set to track the resultant sentiment following the monetary policy decisions by two major central banks later today. Meanwhile developments in the Eurozone, coupled with the outcome of the Spanish and French bond auctions, are likely to influence overall risk appetite.

Euro – European Markets

The Euro weakened against the US Dollar in the previous trading session as markets continued to speculate a 0.25% interest rate cut from the ECB at its policy meeting due later today. Additionally, contagion fears were rekindled after data indicated that the Italian deficit to GDP ratio swelled to 8% in the first quarter. Meanwhile, in significant developments yesterday, Monti-Merkel agreed to work together to tackle the Eurozone debt crisis, while Austria ratified the €500 billion European Stability Mechanism. However, the common currency has declined marginally against the US Dollar this morning ahead of the ECB’s monetary policy stance wherein the benchmark interest rate is expected to hit a record low of 0.75%. The ECB President, Mario Draghi’s press conference following the decision will also be keenly tracked for further insights on the flagging economy. On the macro front, markets await the release of German factory orders data, which is expected to indicate a rebound for May. Moreover, the outcome of the Spanish and French bond auctions will also help to gauge the risk appetite of the market for these sovereign bonds.

Other Currencies – Highlights

Muted risk appetite ahead of the monetary policy decisions from major central banks in Europe led the Yen to strengthen against the majors this morning. Moreover, the Yen continues to post gains against its major counterparts after the Bank of Japan (BoJ), in its quarterly report released this morning, raised its assessment for all nine regional economies in the nation. This came on the back of the upbeat Tankan survey reported earlier this week. Adding to the optimism the BoJ Governor, Masaaki Shirakawa, opined that the Japanese economy is headed for a moderate recovery. However, he warned that the European debt crisis poses a big risk to the nation’s financial system. The outcome of the interest rate decisions, coupled with news flow emanating from the Eurozone, is likely to set the risk tone for today’s trading session.