Can UK Crawl Out of Recession?

Although UK’s construction PMI data was disappointing, the upbeat manufacturing and services sector activities have strengthened argument that the BoE might refrain from fresh action at tomorrow’s policy meeting. The recent buoyancy shown in the UK economy has sparked optimism that the country is paving its way out of the recession. Although the ECB is likely to undertake measures in tomorrow’s meeting, markets have sought shelter in safe havens today on worries that the central bank might undershoot market expectations. With yesterday’s ISM data offering more evidence of the prevalent weakness in the US manufacturing sector, non-farm payrolls data on Friday could prove decisive for the Fed’s policy meeting next week.

Pound Sterling – UK Markets

With indicators pointing that the British economy is slowly emerging out of a recession, the Pound has continued its upward momentum against the Euro in today’s session. The positive economic releases from the UK have cemented speculation that the BoE would leave its interest rate and asset purchase target unchanged at current levels in its monetary policy meeting due tomorrow. Data released yesterday revealed that the UK's dominant services sector PMI climbed more than expected for August to its highest level in five months. The upbeat services figures managed to soothe concerns raised by weak construction data released earlier during the day. With manufacturing and services indicators revealing a sharp improvement for August, there is growing optimism that UK would manage to avoid a recession in the third quarter. On the inflation front, data from BRC released earlier today revealed that shop price inflation rose marginally for August. With no other major economic releases scheduled during the day, traders are expected to stay focussed on the monetary policy meetings of the BoE and the ECB slated tomorrow.

US Dollar – US Markets

The US Dollar has advanced against its peers in today’s session, on increased risk of disappointment at the ECB meeting tomorrow. Yesterday’s ISM data revealed that the manufacturing activity in the US unexpectedly shrank in August, marking the third consecutive monthly contraction and registering its lowest level since July 2009. The manufacturing index reading for the period was in sync with the regional manufacturing indices. However, the downbeat data had a limited impact on the greenback, as uncertainty over the ECB’s monetary policy meeting offset growing hopes of a fresh round of QE. Meanwhile, non-farm productivity and ISM New York manufacturing index due later today are likely to be overshadowed by the run to the ECB’s monetary policy meeting tomorrow. Additionally, non-farm payrolls data scheduled for release on Friday is expected to settle doubts over the stance that the Fed might adopt in its monetary policy meeting next week.

Euro – European Markets

The Euro slipped against its peers in today’s trading session, as traders have tone down their risk appetite ahead of tomorrow’s ECB meeting. Although there is growing optimism that the ECB would unleash fresh measures to tackle the crisis, fear of the central bank’s action falling short of market expectations have prompted traders to shun the Euro. Meanwhile, the European Commission President voiced his support for the ECB intervening in bond markets to clampdown borrowing costs in peripheral nations. However, he also backed the German stance of calling for a treaty change to transfer control of fiscal situation of troubled nations to European institutions. The comments indicate a growing divide among policymakers, as Spanish Finance Minister indicated that Spain would not agree to give up its fiscal sovereignty. Traders are keeping a close eye on the Eurozone retail sales data due for release later today which is expected to slip further for July, providing more evidence of the region’s dismal retail scenario. Market participants are also expected to begin positioning themselves ahead of the major events from Europe and the US during the next two days.

Other Currencies – Highlights

The Japanese Yen has climbed against its major peers this morning, as traders turned cautious ahead of the ECB’s monetary policy meeting tomorrow, prompting them to move towards safe haven assets. There is growing speculation that the central bank’s policy action may not meet market expectations. Meanwhile, the Bank of Japan (BoJ) taking further monetary policy action remains in the realm of possibility after the BoJ board member, Ryuzo Miyao, stated that the Japanese central bank must take careful and bold steps when necessary. Additionally, a former BoJ Deputy Governor urged the central bank to adopt further easing measures to prevent appreciation in the Yen and help the nation to emerge from deflation. Traders are expected to keenly follow the BoJ Governor, Masaaki Shirakawa’s comments tomorrow for more insights on the monetary policy front. With little on offer from the domestic economic calendar during this week, the Japanese Yen is expected to be guided by cues from the Eurozone and the US for further direction against the majors.