Central Banks to get Creative

Mounting speculation that major global central banks will move more positively to support their economies spurred demand for high yield currencies yesterday. Supporting this stance the ECB President, Mario Draghi, offered a life-line in the form of a plan to purchase 3-year bonds to rescue troubled Eurozone nations. However, Moody’s put the EU on “Negative” outlook, fanning speculation of some action at the ECB policy meeting on Thursday. During the day, US ISM manufacturing data and key diplomatic meetings of European leaders are both likely to prove pivotal in determining market risk appetite. Back home, data just out has revealed an unexpected contraction in the construction sector for August.

Pound Sterling – UK Markets

Buoyant manufacturing activity data for August, coupled with a rebound in the Lloyds business barometer for the same period, kept speculation over further monetary easing at bay and led the Pound to climb against the US Dollar yesterday. Today’s session has witnessed Sterling trading marginally higher against the US Dollar. Data just out has indicated that the British construction sector unexpectedly contracted for August. Additionally, the BRC this morning has reported an annual decline in same store retail sales for August, citing minimal impact of the London Olympics in boosting sales. However, the Pound has lost ground against the Euro following positive comments from the ECB President in tackling the region’s debt crisis. In today’s trading session, market participants are keeping a close watch on Halifax house prices, which is likely to show a monthly rebound for August. Additionally, Greek bond auctions and news flow emanating from the Eurozone are likely to garner increased interest during the day.

US Dollar – US Markets

Lack of direction from the US after Wall Street was closed for a public holiday yesterday, led the US Dollar to trade on a weaker footing against the majors. The greenback has continued to witness a downtrend against its major counterparts this morning amid improved risk appetite, after the ECB President, Mario Draghi, signalled plans to purchase bonds of troubled European nations. All eyes for the day are set on the ISM manufacturing index, which is likely to enter expansionary territory for August and could make things trickier for the Fed. Meanwhile, construction spending and manufacturing PMI also feature on the economic calendar today and are expected to attract a relatively tepid response. With Bernanke leaving the door ajar for QE3 and expressing concerns over the job market, market participants are set to scrutinise Friday’s non-farm payrolls data to judge the prospective stance of the central bank. For the session ahead the US Dollar should respond to domestic macro data, as well as pivotal developments in the Eurozone.

Euro – European Markets

Dismal manufacturing data across the Eurozone for August fuelled concern and led the Euro to weaken against Sterling in the initial part of yesterday’s trading session. However, the common currency pared its decline and strengthened against the majors in the later part of the session as heightened speculation over further easing by major global central banks boosted demand for riskier assets. The Euro has extended its previous session gains against the majors this morning after the ECB President, Mario Draghi, infused new life into the markets as he hinted at purchases of three year bonds in the secondary market to rescue the debt laden nations. Moody’s downgrade of the EU outlook to “Negative” seems to have been taken in stride by investors. On the macro front, the annual Eurozone producer price inflation data, due later today, is expected to show an easing trend for July. However, the single currency is set to keenly track the Greek bond auctions and the outcome of the meetings of key European leaders scheduled later in the day for more cues.

Other Currencies – Highlights

The Swiss Franc is trading higher against the US Dollar this morning, even as data indicated an unexpected contraction in the Swiss GDP for the second quarter. This followed a raft of downbeat economic releases yesterday, including a slower pace of growth in retail sales for July and an unexpected decline in manufacturing PMI for August. Meanwhile Thomas Jordan, the Chairman of the Swiss National Bank, reiterated its commitment towards enforcement of a cap on the Swiss franc as he cautioned that a further appreciation of the currency would pose a substantial threat to the Swiss economy and would fuel risk of deflationary developments. For the session ahead, the Swiss Franc is expected to respond to risk sentiment in the market. Additionally, market participants have set their sights on key domestic releases including consumer price inflation and unemployment data slated for release later this week.