UK needs to Deliver as Contractions Worsen

Today’s second quarter GDP data has revealed a sharp contraction in the British economy, partly on account of the foregone output from the extra Diamond Jubilee bank holiday and heavy rainfall during the previous quarter. With the recent bond auctions hinting that Spain might lose access to credit markets, fears of the nation seeking a bigger aid package dominated traders’ minds and triggered Moody’s latest move to cut the credit rating outlook on the EFSF. With reports hinting a possibility of the Fed embracing more easing, key US economic indicators during the course of the week will be closely monitored.

Pound Sterling – UK Markets

The Pound has weakened sharply against the Euro and the US Dollar this morning as hopes of the British economy staging a recovery faded, after the latest GDP data revealed that UK GDP contracted more than expected for the second quarter at 0.7%. This was attributed to loss of output due to the additional bank holiday in June and heavy rainfall during the previous quarter affecting consumer spending. The disappointing data could turn up the heat on Chancellor, George Osborne, to undertake growth boosting measures and give up the government’s current austerity stance. The outlook for the UK’s housing market remains bleak, as data yesterday revealed that mortgage approvals fell to the lowest level since the British Bankers' Association began maintaining records. Despite disappointing economic data, the Pound climbed against the Euro in yesterday’s trading session as worries over the debt situation in Spain and Greece remained at the helm of market worries. With key economic releases out, the Pound could trade under pressure against the majors throughout today’s trading session.

US Dollar – US Markets

The US Dollar climbed to multi-year highs against the Euro in yesterday’s session, as weak PMI readings from European economies highlighted the impact of the debt crisis on the region’s economic growth. In today’s session, the US Dollar is trading lower against the Euro amid reports that the US Fed was moving closer to initiating new measures to spur economic activity. Yesterday’s data revealed that the Richmond Fed manufacturing activity unexpectedly plunged for July, highlighting the grim situation in the nation’s manufacturing sector and boosting speculation of QE3. Despite yesterday’s positive Chinese economic data and the recent round of easing adopted by the Chinese central bank, the IMF indicated that the nation’s economy faces significant downside risks. Apart from new home sales and mortgage applications data due in today’s session, market participants are also expected to take cues from the news flow emanating from the Eurozone for further direction. Markets are also keeping an eye on second quarter US GDP and durable goods orders data due later this week.

Euro – European Markets

Yesterday, the Euro weakened against the major currencies, as economic data continue to point towards weakness in core Eurozone economies after PMI readings revealed that the manufacturing sector in Germany, France and the Eurozone contracted in July. Additionally, concerns over Greece failed to abate, as EU officials indicated that the country might require further assistance to tackle its debt problem. Worries of Spain losing credit access received a boost, following a rise in its borrowing costs at a short term bond auction yesterday. The Euro has moved higher against the US Dollar this morning. Meanwhile, fears of a bigger Spanish bailout prompted Moody’s to lower its rating outlook on the EFSF to ‘Negative’ from ‘Stable’. This comes on the back of yesterday’s rating outlook downgrade on key Eurozone economies. Moreover, data released earlier today revealed that German business confidence fell to its lowest level since March 2010. In today’s trading session, markets are expected to monitor the situation in Spain and Greece for further direction.

Other Currencies – Highlights

The New Zealand Dollar is trading lower against the majors in today’s trading session, as markets remain cautious ahead of the central bank’s interest rate decision due later today. The Reserve Bank of New Zealand is expected to leave its benchmark interest rate unchanged at 2.5%, but traders speculate that the central bank might be more dovish in its statement, strengthening hopes of an interest rate cut later this year. However, despite widespread fears over a global economic slowdown, data revealed that New Zealand’s trade surplus widened on the back of better than expected exports. Although the central bank’s monetary policy meeting is expected to remain the key feature in today’s session, markets are expected to pay modest attention to the news flow from the Eurozone.