Draghi Magic Works Again

The ECB Chief, Mario Draghi, once again managed to drive risk appetite by strongly voicing his commitment to pursuing initiatives announced by the ECB in its last monetary policy meeting. Although the Chairman’s vigour continues to buoy market sentiment, a series of positive responses to Spain’s bond auctions has provided room for the nation to continue with its delaying tactics. Meanwhile BoE policymakers, along expected lines, kept the key interest rate and asset purchase target unaltered at current levels. Across the Atlantic, non-farm payroll figures today will be closely watched.

Pound Sterling – UK Markets

In yesterday’s trading session, the Pound continued to climb against the US Dollar after the BoE decided to leave its base rate untouched at 0.5% and maintain the level of asset purchases at £375 billion. Meanwhile, Sterling remained in tight range against the Euro, as optimism surrounding an unchanged monetary stance of the BoE was offset by encouraging comments from the ECB. However, the latest PMI readings have shown that construction and manufacturing industries contracted at a faster than expected pace and services industry grew at a slower pace, stoking fears that the recent improvement in the economy might be broadly due to temporary effects of the London Olympics. Given the weak set of PMI releases for September, next month’s monetary policy meeting remains a close call on whether the BoE chooses to alter its current monetary stance. Against this backdrop, next week’s industrial production and trade balance data is expected to offer some hints to market participants.

US Dollar – US Markets

The US Dollar witnessed sharp selling in yesterday’s session on growing belief that major global central banks would take essential measures in averting a crisis in the global economy. The ECB Chief, Mario Draghi, reaffirmed the central bank’s commitment to stand guard against rising borrowing costs in troubled nations in the Eurozone. Meanwhile, the minutes of the Federal Reserve’s latest monetary policy meeting revealed that policymakers firmly believed that additional monetary stimulus was warranted, as the labour market continued to grapple with problems surrounding the economy. With fiscal problems in the US remaining a major threat to the recent economic recovery, St. Louis Fed President, James Bullard, opined that the Fed’s liquidity inducing measures could trigger a spike in borrowing costs. With major indicators from the US surprising on the upside and the greenback trading almost flat against the majors, today’s non-farm payrolls figure will be keenly eyed for some positive surprises. Markets are expected to pay passing attention to today’s consumer credit figures in the US.

Euro – European Markets

The ECB Chief once again played a pivotal role in setting the trend for currency markets. The Euro rose against the US Dollar after the ECB President reaffirmed that they have set a “fully effective backstop mechanism” to purchase bonds of troubled Eurozone countries and hinted that conditions linked to the ECB’s assistance would not necessarily be punitive. Meanwhile, ECB maintained its interest rate unchanged at its monetary policy meeting. Spain once again witnessed its borrowing costs fall at its bond auction, providing some breathing space for the debt laden nation ahead of its crucial regional elections later this month. However, the country continues to move closer to the brink as the Bank of Spain Governor, Luis Maria Linde, indicated that the nation’s financial forecasts are “optimistic” and there was risk of “slippage”. The Euro has eased marginally against the US Dollar and Sterling in today’s session, as the single currency lost steam following yesterday’s decent trading session. Markets await today’s German factory orders and US employment data for further direction.

Other Currencies – Highlights

The Japanese Yen is trading marginally higher against its major peers this morning after the Bank of Japan left its benchmark interest and asset purchases unchanged at current levels, despite political pressure for undertaking bolder policy actions. The BoJ’s downbeat assessment of the global economy has boosted speculation that the central bank might unveil additional stimulus measures in the near future. However, the BoJ Governor, Masaaki Shirakawa, indicated that consumer price inflation staying below the BoJ’s target rate would not necessitate immediate policy action. On the macro front, data revealed that the leading economic index climbed more than expected for August. With no domestic releases scheduled today, investors are likely to be focussed on the US employment report due later today for deciding the trend for market risk appetite.