Merkel Toughens Stance

The German Chancellor, Angela Merkel, on Sunday, reaffirmed her support for a closer and more centralised European Union, but reiterated that the Eurozone nations seeking financial aid should adhere to tough fiscal targets. Meanwhile, the Chinese Premier warned that China's economic woes will continue for some time. The IMF’s global growth forecast, US retail sales and New York manufacturing data later today have the potential to drive risk sentiment. The movement in Sterling against the majors during the course of the week is likely to be determined by the BoE’s minutes, inflation, jobs and retail sales numbers.

Pound Sterling – UK Markets

On Friday, the Pound outperformed the US Dollar amid hopes of a fresh round of monetary easing in the US after Chinese second quarter economic growth matched market expectations. Additionally, Moody’s decision to slash Italy’s sovereign credit rating prompted traders to shun the Euro and move towards Sterling. In today’s trading session, Sterling is trading with a downward bias against the US Dollar after a survey by Rightmove released earlier today revealed that UK house prices for July retreated for the first time in six months and recorded the sharpest fall for the month in four years. Adding further to the gloom, data out on Friday revealed that UK’s annual construction output for May dropped 6.3%, fuelling concerns that Britain’s economic growth might contract for a third consecutive quarter. With a light economic calendar today, traders await a series of key economic releases from the UK during the course of the week to provide more clarity over the nation’s economic situation.

US Dollar – US Markets

The US Dollar weakened against the majors in Friday’s trading session, as data indicating weak consumer sentiment and easing producer price inflation stoked speculation of a third round of quantitative easing by the US Federal Reserve. Additionally, an in line Chinese second quarter GDP data prompted traders to move away from safe haven assets. Meanwhile, the greenback has moved marginally higher against both the Pound and the Euro this morning ahead of the US Fed Chairman, Ben Bernanke’s testimony due tomorrow which is expected to shed light on the stance of policymakers for a new round of QE later this year. With the recent set of economic indicators hinting towards steadily deteriorating consumer morale in the US, retail sales data scheduled for release later today is expected to garner market attention. Additionally, the Empire state manufacturing survey for July is expected to provide initial insights into the economic performance at the beginning of the third quarter. Moreover, the IMF’s global economic growth forecasts are among the key events to look out for during the course of the day.

Euro – European Markets

The Euro ended Friday’s session on a strong note against the US Dollar, as concerns over the Chinese economy eased after the nation’s second quarter economic growth matched market expectations. However, during the weekend, the Chinese Premier, Wen Jiabao, warned that the nation’s economic growth has not yet gathered momentum and that “difficulties” may continue for a period of time. Meanwhile, the Euro has begun the week on a softer footing against the US Dollar, after the German Chancellor indicated that she has not tempered her stance from the last month’s summit, as she demanded for more central control over Euro member states in return for joint debt-sharing. However, she managed to soothe near term worries by expressing her confidence that German lawmakers would back the recent aid package for Spain's ailing banking sector. With the ECB President, Mario Draghi, keeping hopes of further interest rate cut alive, today’s Eurozone consumer price inflation figure is likely to be closely tracked as the latest trend indicates that inflation has been moving closer to the central bank’s target rate. Meanwhile, downward revision to the IMF’s global growth projection has not been ruled out following the recent set of dovish statements from the IMF.

Other Currencies – Highlights

The Swiss Franc has declined marginally against its major peers in today’s trading session after the head of Switzerland's federal budget office indicated that the central bank's cap of 1.20 Swiss Francs per Euro was essential for the economy and could be effectively defended by the authorities. However, data indicating that annual industrial production in Switzerland grew for the first quarter had no meaningful impact on the Swiss Franc. Swiss export data, later this week, would be closely tracked to gauge the impact of the recent slowdown witnessed in emerging economies. Moreover, the Chinese Premier, Wen Jiabao, warned that China’s economic recovery was not stable and could potentially face hardships in the near future. The IMF’s growth forecast due today and the Fed Chairman’s testimony tomorrow are expected to provide further direction to risk appetite.