G7 Keeps Europe’s Hope Alive

An air of optimism following the G7 conference call, wherein members agreed to coordinate their response to the European debt crisis has boosted demand for high yield assets this morning. With the worsening situation in peripheral Eurozone economies, markets await some fresh action from the ECB at its monetary policy meeting and the subsequent press conference due later today. Across the Atlantic, last week’s dismal jobs report has rekindled hopes of QE3 and today’s Beige book economic survey is likely to provide some food for thought. At home, data just out indicates that construction activity fell for May, in sync with last week’s poor manufacturing numbers.

Pound Sterling – UK Markets

Sterling has climbed against the US Dollar in today’s trading session amid improved risk appetite after G7 finance ministers indicated that there will be a speedy response to the European debt crisis. Additionally, corroborating the positive results from CBI’s retail survey last week, data from the British Retail Consortium released today indicated that shop price inflation rose for May, as retailers offered fewer discounts. Meanwhile, the Pound is holding steady against the Euro this morning. Following last week’s dismal manufacturing report, data just released indicated that construction PMI declined for May. The weak set of PMI readings from Britain have strengthened perception that the recession is deepening and would shift focus onto the potential policy response from the BoE at its two day monetary policy meeting starting today. Moreover, worries over the situation in Europe seems to have taken its toll on the confidence among British business houses, as data from Lloyds Bank revealed that business sentiment in the UK slumped for May.

US Dollar – US Markets

In today’s trading session, the US Dollar is trading weak against Sterling and the Euro after G7 finance ministers and central bank governors agreed to aid Spain and Greece to place their public finances on a sustainable footing. Additionally, the greenback took a hit against the majors amid heightened speculation over further easing after the Chicago Fed President, Charles Evans, opined that soft US economic data warranted “extremely strong accommodation”. Last week’s dismal non-farm payrolls report, coupled with a contraction in the ISM New York manufacturing activity and an unexpected decline in factory orders released earlier this week, has highlighted that the US economy is losing momentum. Along with the ECB’s crucial rate setting meeting on deck for the day, markets keenly await the Fed’s Beige book survey for an overall assessment of the US economy. Other economic releases include non-farm productivity, unit labour costs and MBA mortgage applications.

Euro – European Markets

Yesterday, the Euro declined against the US Dollar following dismal service sector PMI readings from major Eurozone nations and sharper-than-expected contraction in the region’s retail sales. Highlighting the dire state of the Spanish economy, the nation’s Treasury Minister, Cristobal Montoro, indicated that the nation was losing access to credit markets and urged European nations to help revive its banks. However, the common currency has moved higher against the US Dollar in today’s trading session, as hopes of support for the beleaguered peripheral Eurozone economies remained alive. Policy makers from major economies have expressed their intention to offer support to Spain and Greece in tackling the economic crisis. The spotlight for today’s session rests on the ECB’s monetary policy meeting followed by crucial comments by Mario Draghi at the press conference. Even as a rate cut is unlikely, worsening situation in the peripheral regions may exert pressure on the central bank to introduce some measures to arrest the region’s debt crisis. Additionally, Eurozone’s first quarter GDP, German industrial production and debt auctions in Portugal and Germany are also likely to be closely tracked.

Other Currencies – Highlights

The Aussie Dollar has rallied against its major counterparts in today’s trading session following robust GDP data for the first quarter. On an annual basis, the Aussie economy grew faster than expected 4.3% for the first quarter compared to a 2.5% expansion seen during the previous quarter. The strong GDP reading has argued firmly in favour of the central bank remaining on the sidelines in coming months. Looking ahead, markets will focus on May employment data tomorrow. Yesterday, the central bank slashed its key interest rate by 25 basis points to 3.5%, in line with market estimates. The ECB’s interest rate decision, coupled with macro releases across the Atlantic, is likely to influence the risk tone in today’s trading session.