QE3 to sail from US?

Across the Atlantic, calls for the Federal Reserve to press the accelerator is getting louder following yesterday’s weak retail sales data for May. Further strengthening the case for QE3 is today’s consumer price inflation which is anticipated to ease for May. In Europe, after Moody's downgraded its credit rating on Spain and Cyprus, focus has now shifted to the Italian bond auctions due later today. At home, with an economic calendar on the lighter side, markets are likely to focus on the Mansion House speeches by the BoE Governor and the Chancellor of the Exchequer later today for further hints on the state of the economy.

Pound Sterling – UK Markets

The Pound bounced around against the Euro in yesterday’s trading session, while it was fairly range bound against the US Dollar in the absence of any significant domestic economic indicator. Sterling is trading on a weaker footing against the majors this morning amid mounting speculation that the BoE might resort to more easing later this year to shield the economy from the effects of the Eurozone crisis. Weakness in the manufacturing and construction PMIs reported in the recent past, coupled with dismal industrial production data for April, seems to have strengthened the case for further stimulus. Amid the uncertain economic environment in the UK, markets are expected to closely read into tonight’s Mansion House speeches by BoE Governor, Mervyn King and Chancellor, George Osborne. The Governor’s statements are expected to set the stage for next week’s release of the central bank’s minutes of its latest rate setting meeting. Meanwhile, George Osborne is likely to reiterate his commitment to the austerity programme.

US Dollar – US Markets

A second consecutive monthly decline in US retail sales data for May fuelled speculation over QE3 and dragged the US Dollar lower against the Euro yesterday. However, the greenback has moved higher against the majors this morning on increased risk aversion, following a three notch downgrade of the Spanish credit rating by Moody’s. With the US wholesale price inflation hovering at a three year low, market participants keenly await the consumer price inflation data later today, which is expected to fall below the Fed’s target rate of 2%. The outcome is likely to strengthen the case for a potential new wave of liquidity infusion by the central bank. Moreover, the initial jobless claims report is also likely to garner market interest for hints on the labour market. The outcome of the keenly awaited Italian bond auctions and economic releases in the US are expected to set the risk tone in today’s trading session.

Euro – European Markets

Yesterday, the Euro advanced against the US Dollar on rising hopes of a new round of stimulus for the US economy and after a pre-election poll in Greece indicated that pro-bailout party, New Democracy, continued to retain its lead over other national parties. However, the Euro has declined against the US Dollar in today’s trading session, as market participants tread cautiously ahead of the outcome of the Italian bond auctions scheduled later today. Following the recent aid package to Spain, traders continued to fear that Italy could be next in line to seek assistance to tackle its fiscal situation. Rating agencies continued to cast doubts over the Spanish economy, with Moody’s joining Fitch in downgrading the nation’s credit rating to the brink of junk territory. Moreover, economic data also failed to offer much respite, as data released yesterday indicated that industrial production in the Eurozone contracted at a faster pace for April. Against this backdrop, market participants await the Eurozone consumer price inflation data slated for release later today.

Other Currencies – Highlights

This morning, the Kiwi Dollar has weakened against the US Dollar, as risk appetite took a hit on persistent concerns surrounding Spain and ahead of the crucial Italian bond auctions due later today. On the domestic front, the Reserve Bank of New Zealand (RBNZ) retained its benchmark interest rate at 2.5% in line with market estimates. However, the central bank Governor, Alan Bollard, indicated that the worsening situation in the Eurozone, coupled with lower commodity prices and easing inflation, strengthens the case for a stimulatory monetary policy. The performance of manufacturing index and ANZ consumer confidence index scheduled for release tomorrow is likely to be keenly eyed. However, bond auctions in Italy and inflation data across the Atlantic