The Great Escape

In the UK, the National Institute of Economic and Social Research (NIESR) yesterday provided some much need relief to investors after it indicated that the British economy appears to have escaped the clutches of recession as it expanded in the three months to May. However, the BoE Deputy Governor has reminded markets today that the UK economy cannot remain impervious from the Eurozone debt crisis. Meanwhile the situation in Spain seems to be worsening, as evident from the rise in the nation’s 10-year bond yield to multi year highs. Across the Atlantic, retail sales report due later today will garner much of the attention and is likely to help market participants to gauge the need of a QE3 in future.

Pound Sterling – UK Markets

Sterling recorded gains against the US Dollar in yesterday’s trading session after the NIESR indicated that the British economy has emerged from recession in the three months to May. Moreover, rising Spanish bond yields supported the upward trend in the Pound against the Euro. Data indicating an unexpected annual decline in UK manufacturing production for April had little impact on the Pound. While the economic situation looks somewhat better, downside risks to growth due to the European crisis are still very prevalent as indicated by the BoE Deputy Governor, Paul Tucker. Dovish comments from Paul Tucker and Adam Posen during this week has strengthened speculation that the central bank might resort to additional easing measures in the future. The Pound has lost ground against the Euro this morning. With an apparently quiet day in terms of macro indicators, all eyes are set on the trade balance data slated later this week which is likely to indicate that deficit has narrowed for April. Additionally, developments in the Eurozone will also be keenly tracked for further hints on market risk appetite.

US Dollar – US Markets

Yesterday, the US Dollar took a hit against the Pound following a cautiously optimistic estimate of the British GDP. Moreover, data indicating a wider US budget deficit for May reiterates the recent cautious stance taken by credit rating agencies over the US economy. Adding to the woes, the IBD/TIPP economic optimism index logged in a more-than-expected decline for June. Demand for the greenback remains relatively muted in today’s trading session, as prevalent debt worries in the Eurozone were countered by rising calls for more monetary stimulus for the US economy. The Chicago Federal Reserve President, Charles Evans, earlier reiterated his support for additional monetary stimulus to spur growth. On the macro front, retail sales report due later today is expected to aid in gauging the strength of the nation’s consumer morale, amid the prevalent weakness in the jobs market. Additionally, producer price inflation data is likely to provide an insight into the impact of falling crude oil prices on the nation’s input costs.

Euro – European Markets

A €100 billion aid packasge to Spain failed to allay mounting fears over the nation’s banking sector as Fitch yesterday downgraded its credit rating for 18 Spanish banks and dragged the Euro lower against the Pound. Market nervousness was evident as 10 year Spanish bond yield rose yesterday to the highest level since 1997. However, the Euro has taken a breather this morning and pared its declines against the majors. Data out earlier today indicated that the German consumer price inflation (CPI) stabilised for May while the French current account deficit narrowed for April. In today’s trading session, investors are set to closely track the Eurozone industrial production data for April which is likely to reveal the fastest pace of decline in seven months. Additionally, markets seem to be a little wary ahead of tomorrow’s Italian bond auctions, especially after Austria's finance minister opined that Italy may need a financial rescue owing to its high borrowing costs.

Other Currencies – Highlights

In today’s trading session, the Australian Dollar has gained against the US Dollar after Moody’s indicated that the outlook for Australia’s “AAA” rating remains stable. Additionally, the Westpac/Melbourne Institute indicated a slight improvement in Australian consumer confidence for June. This comes on the back of the recent interest rate cut by the central bank. Meanwhile, the Reserve Bank of Australia’s (RBA) Governor, Glenn Stevens, backed the strong currency and opined that the strength would be probably sustained on the back of mining investment boom in the nation. The outcome of the Italian bond auctions tomorrow and the weekend vote in Greece is likely to set the risk tone for the next few trading sessions. On the domestic front, market participants keenly await the consumer price inflation estimates scheduled later this week. Additionally, the minutes of the RBA’s last rate setting meeting due next week is expected to offer hints over the nation’s interest rate cycle.