Will the Fed Rejoice?

Market participants had a pleasant surprise yesterday with a raft of US economic releases, ranging from labour to manufacturing, coming in better than expected. With the extent of the Fed's QE3 largely dependent on the health of the US jobs market, the release of today’s non-farm payrolls data will be keenly awaited. Across Europe, concerns over whether Greece would secure the next tranche of its bailout funding following a Greek court’s protective ruling has put pressure on the Euro today. At home, construction PMI just out has shown an improvement for October, in contrast with yesterday’s weak manufacturing activity data.

Pound Sterling – UK Markets

Sterling pared its initial session gains against the US Dollar yesterday following the release of strong US economic data. Additionally, data indicating further contraction in the UK manufacturing sector activity for October, takes some of the sheen off the optimism surrounding the economy. In the initial trading session, the Pound was firmer against the majors following CBI’s positive assessment of the UK economy and robust housing data from Nationwide. In today’s trading session, Sterling has gained ground against the Euro amid renewed worries about the Greek debt crisis. Data just out has indicated that construction sector activity in the UK expanded for October. However, markets expect the BoE to take a breather at the next week’s monetary policy meeting, with the central bank expected to further dissect domestic data and developments in the global economy. With a light economic calendar in the UK today, Sterling is likely to seek further direction against the majors from the US jobs report. Next week’s finely balanced monetary policy meeting is also likely to prompt traders to trim back their bets on the Pound.

US Dollar – US Markets

The flurry of robust economic data in the US proved positive for the US Dollar against the majors yesterday. Data indicated that the number of individuals filing for initial jobless claims fell more than expected last week and came on the heels of an upbeat ADP private sector employment report. This should provide some relief to the Fed whose actions seem to be bearing some fruit. Additionally, the US consumer confidence rose to the highest level since February 2008 and the ISM manufacturing index rose to a five month high in October. Meanwhile, the President of the Federal Reserve Bank of Boston, Eric Rosengren, provided a specific threshold unemployment rate for the Fed to exit both the QE3 and the ultra easy interest rate regime. Against this backdrop, today’s much awaited non-farm payrolls data is expected to show an improvement for October. Factory orders and ISM New York index also feature on the economic deck today but are likely to be overshadowed by the all important monthly jobs report. With the US Dollar trading on a firmer footing against the majors today, we believe that the US labour market data would prove crucial in determining the further movement of the greenback.

Euro – European Markets

The pain in Greece seems to be aggravating by the day and a solution to its problems remains elusive, weighing on the performance of the Euro against both the Pound and the US Dollar in today’s trading session. The inconclusive discussion between Greece and its European counterparts has raised concerns about Greece’s ability to implement austerity measures needed to secure the bailout money. Compounding the woes, the cut in pensions and salaries for state employees that the Greek government had planned was termed as “unconstitutional” by a Greek court. The situation across Europe also fails to inspire confidence among market participants, with data released earlier today confirming a contraction in the manufacturing activity in major European economies and the unemployment rate in the Eurozone reaching a record high earlier this week. We believe that the “risk on” sentiment in today’s trading session is temporarily on pause, as traders wait to see the state of the US non-farm jobs due later today.

Other Currencies – Highlights

The Australian Dollar is trading under pressure against the US Dollar this morning ahead of the Reserve Bank of Australia’s interest rate decision scheduled early next week. The central bank is expected to lower its key interest rate by 0.25% to boost its economy, in sync with the liquidity boosting measures adopted by its other global counterparts. Additionally, today’s softer than expected producer price inflation data in Australia for the third quarter has further tilted scales in favour of an interest rate cut next week. Additionally, market optimism surrounding yesterday’s upbeat Chinese manufacturing data seems to have faded. Apart from the interest rate decision, investors await a heavy economic calendar in the coming week. Employment, services and construction PMIs, trade balance and retail sales are the major economic indicators to look out for, as they have the potential to impact the direction of the Aussie Dollar against the majors.