All Hail to the King

Data just out has revealed that the BBA mortgage approvals continued to climb, reaffirming hopes that the UK government’s lending scheme is slowly taking shape and supporting the British economy. With the BoE policy makers split over whether to buy more government debt, traders would closely follow the BoE Governor Mervyn Kings' comments later today for more clarity. The Spanish government hailed the outcome of the recent elections as an overwhelming support for the austerity programme but there are few takers, as Moody’s latest move to slash its credit rating on five regions in Spain highlights the depth of the nation’s fiscal woes. Meanwhile, the US Fed kick starts its two day monetary policy meeting today.

Pound Sterling – UK Markets

The Pound has garnered strength against the Euro in today’s trading session after Moody’s downgraded its credit rating on five Spanish regions. Additionally, data from the BBA indicated that demand for mortgage loans rose more than expected for September, reflecting the change in sentiment among property buyers following the BoE and the UK government’s jointly undertaken lending initiative. Meanwhile, markets are expected to keep a close eye on the BoE Governor, Mervyn King’s speech later today for more clarity over the stance that the BoE might adopt in its next monetary policy meeting. The BoE Governor had earlier opined that QE has been an effective tool and added that central banks should be flexible while pursuing their inflation targets. However, with the BoE Deputy Governor, Paul Tucker, raising doubts over the effectiveness of QE as an easing tool, markets would eagerly await the BoE Governor’s response. With little on offer from the economic front today, the BoE Governor’s comments and other global events will decide the trend for the Pound against the majors.

US Dollar – US Markets

The US Dollar once again garnered strength against the Euro this morning, as optimism following Spain’s election results faded after Moody’s lowered its credit rating on five Spanish regions. Moreover, traders remain cautious ahead of a raft of confidence figures, PMI surveys and economic growth figures slated for release during the course of the week. Meanwhile, with latest regional manufacturing indices showing signs of improvement, the Richmond Fed’s manufacturing index will be closely watched in order to monitor if the overall strength in the manufacturing sector was intact for the initial phase of the third quarter. Meanwhile, the Fed is scheduled to commence its two day monetary policy meeting today. Traders are expected to keep a watch on whether the central bank provides explicit economic targets and some guidance on how the asset purchases are faring under QE3. With the Richmond Fed’s manufacturing index being the only important economic release today, markets are expected to set their sights on major events across the globe for more direction.

Euro – European Markets

The Euro edged lower against its major peers and moved closer to the 1.30 mark against the US Dollar on persistent fears over Spain’s fiscal situation. The optimism surrounding the positive outcome of Spain’s regional elections seems to have waned, as Moody’s lowered the credit rating on Catalonia and four other Spanish regions. The move was mainly driven by the deterioration in their liquidity positions and prevalent pessimism ahead of large debt redemptions this quarter. Economic data also offered little support to the Euro, as data indicated an unexpected decline in the French business and production indicators. In Germany, signs of the nation buckling under the stress of the region’s fiscal woes emerged after the Bundesbank lowered its economic growth estimate for the final quarter of 2012. Apart from today’s consumer confidence data in the Eurozone, traders brace themselves for a flurry of PMI and sentiment indices due tomorrow.

Other Currencies – Highlights

The Aussie Dollar has declined against the US Dollar in today’s trading session after data indicated that the leading economic index in Australia declined for August. Additionally, traders turned cautious after Moody’s downgraded its credit rating on five Spanish regions. Meanwhile, the probability of the Reserve Bank of Australia lowering its benchmark interest rate in the near future has increased after the nation cut its growth and budget surplus forecasts for the current fiscal year on account of worsening global conditions. Additionally, the board member of the Reserve Bank of Australia, Heather Ridout, appeared cautious as he indicated that Australia's mining boom is showing clear signs of softening. Markets are expected to keep a close eye on tomorrow’s manufacturing PMI data from China to gauge the latest trend in the Chinese economy. Moreover, risk sentiment is likely to be decided from a flurry of economic data scheduled during this week.