Markets Foresee Liquidity Boost

The minutes of the latest BoE monetary policy meeting revealed that the split over further asset purchases widened, with policymakers voting 5-4 to keep QE unchanged at £325 billion. This, coupled with yesterday’s easing consumer price inflation to a 30 month low, has strengthened the probability of further asset purchases at the BoE’s next policy meeting. In Europe, yesterday’s dismal German economic data and alarming 10 year Spanish bond yields have revived hopes of fresh policy action from the ECB. Across the Atlantic, market participants await the outcome of the Federal Reserve’s (Fed) monetary policy meeting concluding today, wherein the central bank is expected to extend its “Operation Twist” program.

Pound Sterling – UK Markets

The Pound has retreated against its major peers this morning, after minutes of the BoE’s latest monetary policy meeting indicated that more MPC members voted in favour of expanding the central bank’s asset purchase target. Additionally, data just out indicated that claimants for jobless benefits increased for May. The underlying picture remains weak as a BoE study revealed that productivity levels of British workers have been slow to recover from the last recession. Sterling edged lower against the Euro in yesterday’s trading session as an unexpected drop in consumer price inflation for May provided room for the central bank to induce additional liquidity, especially after the BoE Governor and other key MPC members indicated last week that more QE was on cards. However, the Pound climbed against the US Dollar amid growing speculation that the Fed might resort to additional easing measures to revive the US economy. With no other significant economic releases on tap, news flow emanating from the Eurozone and the monetary policy decision across the Atlantic will likely dominate risk sentiment for the day.

US Dollar – US Markets

The US Dollar declined against the majors in yesterday’s trading session amid speculation that the Fed may extend “Operation Twist”, a program aimed at lowering longer-term interest rates in a move to support the economy. Moreover, the EU leaders’ pledge at the G20 summit of measures to support the Eurozone economy further dented demand for safe haven assets. This morning the US Dollar has gained against its major counterparts. Although housing starts in the US plunged for May yesterday, the recovery in the housing sector seems to be on track as building permits, which is seen as a leading indicator, rose to the highest level since September 2008. The focus in today’s session rests on the much awaited monetary policy decision from the Fed as it concludes its two day monetary policy meeting later today. Calls for the central bank to resort to QE3 or extend its ongoing “Operation Twist” program has gained momentum amid flagging US economic growth and the intensifying Eurozone crisis. Markets are expected to look closely at the FOMC statement and the Fed Chairman, Ben Bernanke’s press conference for indication of QE3.

Euro – European Markets

Yesterday, hopes of further easing in the US boosted risk appetite and aided the Euro to move higher against the majors. Additionally, Greece progressing towards the formation of a new coalition government, coupled with formulation of definite steps to tackle the Eurozone crisis at the G-20 summit, improved market sentiment. The currency remained unperturbed even as a ZEW survey revealed further deterioration in economic sentiment in Germany and the Eurozone and rising borrowing costs at the Spanish bond auctions. In today’s trading session, the Euro is trading under pressure against its major counterparts amid subdued risk appetite. Meanwhile French President, Francois Hollande, indicated that European leaders are exploring ways for the permanent European rescue fund to buy debt from nations facing the brunt of the region’s debt crisis. With a light economic calendar, market participants are likely to track news flow from Greece along with significant developments across the Atlantic.

Other Currencies – Highlights

The Kiwi Dollar has slid against the US Dollar in today’s trading session after data revealed that the nation’s current account deficit widened more than expected for the first quarter. New Zealand’s current account deficit stood at 4.8% of the nation’s GDP for the first quarter, up from 4.2% in the previous quarter. The weak data highlights that the New Zealand economy remains vulnerable to external shocks. Moreover, a subdued opening to European equity markets also weighed on high yield assets. Earlier in the week, data revealed that New Zealand consumer confidence deteriorated in the second quarter. A weak set of economic data has shifted focus onto the first quarter GDP data scheduled for release later today, which is expected to indicate a sequential acceleration for the first quarter. Meanwhile, the outcome of the US Fed’s monetary policy meeting later today is expected to provide further direction to high yield currencies.