Super Mario

High yield currencies outperformed yesterday with both the Pound and the Euro breaking key levels against the US Dollar after the ECB President, Mario Draghi, indicated a possible central bank intervention to tackle the Eurozone debt crisis. Across the Atlantic, today’s second quarter GDP data is keenly awaited, as it is expected to have a profound influence over the Fed’s stance in next week’s monetary policy meeting. With the UK’s economic outlook darkening, markets await the outcome of the BoE’s policy meeting and key PMI releases scheduled next week for further direction to the Pound against the majors.

Pound Sterling – UK Markets

Sterling rallied against the US Dollar and broke the 1.57 level in yesterday’s trading session, on higher risk appetite after the ECB President, Mario Draghi, indicated that the central bank would be willing to play a bigger role to stem the region’s debt crisis. However, the Pound was relatively unscathed against the Euro. Given the deeper than expected recession in the UK, pressure continues to mount on the British government to ease its tight fiscal policy and deficit-cutting measures, which could trigger a downgrade of the UK’s top-notch “AAA” rating. However, Chancellor George Osborne has reaffirmed the government’s commitment to austerity. With a light domestic economic calendar, the Pound is trading flat against both the Euro and the US Dollar this morning as investors keenly await the US second quarter GDP data due later today, which is expected to influence risk sentiment. Market participants will be keeping a close eye on next week’s monetary policy meeting of the BoE and will closely look for signs of revival in the crucial set of PMI readings.

US Dollar – US Markets

The US Dollar reversed its recent upward trend against the Euro and moved sharply lower in yesterday’s trading session, on increased risk appetite after the ECB President joined his colleague, Ewald Nowotny, in indicating that the central bank would be prepared to act in order to protect the Eurozone. The US macro data provided mixed signals yesterday; with jobless claims falling sharply while durable goods orders, excluding transportation, registering the biggest decline since January. In today’s trading session, the US Dollar has continued to languish close to yesterday’s lows against the majors ahead of the crucial second quarter GDP data due later today, which is expected to indicate a slowdown in economic growth. Traders fear that a weak GDP reading might be interpreted as an increased possibility of early QE3 and could further weigh on the US Dollar. Today’s GDP data completes the major set of second quarter economic releases before the Fed meets next week to decide its course of action to revive the nation’s ailing economy. The US non-farm payrolls and ISM manufacturing data, coupled with key central bank meetings in Europe and the US during the next week, will play a crucial role for risk appetite.

Euro – European Markets

Yesterday, the Euro surged against the US Dollar and inched closer to the 1.23 mark following the apparent new resolve of the ECB. Mario Draghi pledged to do "whatever it takes" to save the Euro within the mandate of the ECB. Next week, market participants will keenly track the ECB meeting to monitor if the central bank follows the ECB President and Governing Council member, Ewald Nowotny’s recent suggestions. Moreover, optimism brewed as Spain’s 10 year bond yield fell below the 7% mark on hopes of an intervention by the ECB. However, Greece remains on the brink of leaving the Eurozone, as the nation’s failure to finalise the political agreement over more austerity poses a severe threat to convincing Troika officials of its commitment to debt reduction measures. Against a backdrop of growing hopes of central bank assistance, German consumer price inflation data remains a key feature in today’s trading session. Moreover, US second quarter GDP data is expected to provide further direction to high yield currencies.

Other Currencies – Highlights

The Australian Dollar is trading higher against its major counterparts this morning, as risk appetite among market participants received a boost after the ECB President, Mario Draghi, indicated that the central bank would be willing to take necessary measures to protect the single currency union. In the absence of any major economic releases for today, traders are expected to position themselves for the US second quarter GDP data scheduled for release later. Turning focus to next week, markets are keeping a close eye on the Australian trade data, which is expected to offer hints about the impact of a slowdown in China. Moreover, a set of indicators on the domestic housing sector, retail sales and manufacturing activity data are further expected to aid in gauging the overall trend in the Australian economy.