Will Central Bankers Deliver?

Traders are bracing themselves for an action packed week ahead, as the US Federal Reserve, the ECB and the BoE prepare to deliver their monetary policy decisions during the course of the week. Although the BoE is expected to hold fire, dovish comments from the FOMC members and a slowdown in the US second quarter GDP growth, coupled with the ECB President’s acknowledgement that the central bank would play a bigger role, has spurred hopes of some policy action during these meetings. At home, a raft of economic data today continues to sketch a weak picture of the domestic economy and should keep Sterling under pressure against the majors.

Pound Sterling – UK Markets

On Friday, Sterling moved higher against the US Dollar amid market speculation of further monetary stimulus from the ECB. Despite positive sentiments brewing in the Eurozone, the Pound is trading marginally higher against the Euro this morning, as S&P reaffirmed its “AAA” rating on the UK economy. However, the Pound has declined against the US Dollar in today’s trading session following weak domestic economic data. On the back of the latest BBA mortgage lending data, figures just released revealed a fall in mortgage approvals for June. The weakness in mortgage demand has trickled down to the housing sector as data from Hometrack earlier revealed its first monthly drop in housing prices this year. In today’s trading session, the CBI’s reported sales survey will remain a key focus, as the recent UK retail sales data has shown signs of weakness. Additionally, markets keenly await the BoE’s monetary policy meeting scheduled later this week.

US Dollar – US Markets

In Friday’s trading session, the US Dollar was under pressure against high yield currencies as second quarter GDP data revealing a slowdown spurred speculation that the Fed might initiate a fresh round of easing in future. Additionally, risk sentiment among market participants received a boost as the French and the German policymakers joined forces indicating their willingness to take necessary actions to preserve the Euro. However, the greenback has moved higher against both the Euro and the Pound in today’s trading session on lower risk appetite among investors. On the macro front, the Dallas Fed manufacturing index due today is expected to garner modest market attention in the build up to this week’s ISM manufacturing data. Additionally, traders would track a key set of US economic releases slated during the course of the week including non-farm payrolls, consumer confidence and personal consumption indicator. However, markets will undoubtedly eye the outcome of the crucial monetary policy meeting of the Fed on Wednesday for further hints on the possibility of QE3.

Euro – European Markets

The Euro retreated against both the US Dollar and the Pound in today’s trading session, as data slated for release later today is expected to confirm that index of household sentiment in the Euro area slipped close to a three-year low for July. Moreover, data released earlier today revealed that the Spanish economy remains mired in recession, affirming the Bank of Spain's forecast earlier this month. Meanwhile, the ECB President, Mario Draghi, has sparked off speculation that the ECB, which holds its monetary policy meeting this coming Thursday, would initiate measures to ease borrowing strain in the region. Moreover, reports indicated that the ECB and other central banks might agree to take a significant write-down on their Greek bonds in order to avoid a Eurozone break-up. Markets will closely monitor the Italian bond auction of up to €5.5 billion today to gauge the impact of expected policy initiatives by the ECB on easing borrowing costs pressures.

Other Currencies – Highlights

The Japanese Yen has climbed against its major peers this morning as data released earlier today revealed that the Spanish economy continued to contract for the second quarter of 2012. Moreover, data scheduled for release later today is expected to indicate that the Eurozone’s consumer confidence remained weak for July. Despite the latest round of easing measures undertaken by the BoJ, data revealed that Japanese industrial production contracted, while vehicle production growth slowed sharply for June. Against the backdrop of weak industrial production data, the manufacturing PMI due for release today is expected to provide hints over the state of manufacturing sector for the initial period of the third quarter. Meanwhile, the unemployment rate is expected to remain steady at 4.4% for June. Apart from the key domestic releases, markets are also expected to track the news flow from the Eurozone for further direction to the Yen against the majors.