QE3 Prospects Float Away in US

Risk appetite was subdued yesterday as the minutes of the US Federal Reserve’s (Fed) latest rate setting meeting revealed little urgency for further stimulus. The minutes showed that a majority of policymakers took the view that further asset purchases would occur only if economic conditions worsened. With the slow pace of EU action fuelling market uncertainty,‎ today’s Eurozone industrial output data for May is expected to indicate a sixth straight annual fall. With little on offer in terms of major macro releases, high yield currencies may trade with a downward bias in today’s trading session.

Pound Sterling – UK Markets

Sterling retreated against the US Dollar in yesterday’s trading session after the minutes of the Fed’s last monetary policy meeting failed to propel hopes of a new round of QE for the US economy. However, the Pound was relatively unscathed against the Euro as prevailing debt worries in the Eurozone were offset by concerns of a deepening recessionary environment in the UK. With the Pound hovering close to its three and a half year high against the Euro, markets fear that Britain's export-led recovery could be jeopardised by the recent appreciation in the domestic currency. However, BoE policymaker Adam Posen, who had voiced his support for more asset purchases, opined that the British economy was not as dire as some feared on account of the private sector job growth and growing exports. With the domestic economic calendar on a light side, traders are expected to track overseas cues for further direction to Sterling against the majors.

US Dollar – US Markets

The US Dollar strengthened against high yield currencies yesterday after the minutes of the latest monetary policy meeting poured cold water on hopes that the Fed would induce a new round of stimulus in the near future. The minutes of the meeting revealed that additional asset buying by the Fed was not imminent on account of lack of consensus among the Fed officials. Few members on the policy setting committee believed that further stimulus to the economy was justified but majority of them were not yet convinced. In today’s session, the greenback has maintained most of yesterday’s gains versus the majors amid subdued risk appetite among investors. Meanwhile, data released yesterday indicated that trade deficit in the US narrowed for May on account of falling crude oil prices and declining demand for consumer goods. With recent economic indicators hinting weakness in the job market, the US Dollar is likely to closely track the jobless claims figures due later today, as it is expected to shed light on the state of the US job market during the final week of the second quarter.

Euro – European Markets

The Euro headed closer to the 1.22 mark against the US Dollar in yesterday’s trading session, as the minutes of the US Fed’s recent monetary policy meeting offered no clear indication whether the central bank would resort to a new round of quantitative easing later this year. With Spain being caught between a rock and a hard place following the recent assistance sought from the Eurozone countries, the nation bowed to the EU ultimatum by pushing through €65 billion worth of austerity measures. The Euro continues to trade under pressure against the greenback in this trading session, as data scheduled later today is expected to indicate that Eurozone industrial production continued to contract for May. The ECB’s monthly report and the ECB President, Mario Draghi’s speech will also be key events for investors to look out for in today’s trading session.

Other Currencies – Highlights

The Japanese Yen moved sharply higher against its major peers this morning after the Bank of Japan (BoJ) refrained from changing its overall stimulus program. The central bank expanded its asset-purchase fund by ¥5 trillion to ¥45 trillion and lowered the size of its credit loan facility by the same amount to ¥25 trillion. Meanwhile, the benchmark interest rate was left unchanged in the range of 0% to 0.1%. Moreover, fading QE3 hopes in the US following yesterday’s FOMC minutes also provided support to safe haven currencies. With the uncertainty surrounding the BoJ’s monetary policy action out of traders’ radar, industrial production data scheduled for release tomorrow is expected to offer further direction to the Japanese Yen against the majors. The Chinese GDP data, scheduled for release early tomorrow, is also expected to closely influence risk appetite among market participants.