The dismal non-farm payrolls data on Friday has managed to tilt scales in favour of the Fed embracing QE3 in its monetary policy meeting later this week. The evident weakness in the job market has sparked easing hopes, as the Fed Chairman had reiterated last month that the labour market would remain the focal point in the Fed's decision making process. Weak data from China and worries surrounding Greece have aided safe haven currencies today.
At home, last week’s PMI and industrial production data added fodder to belief that the British economy is slowly emerging out of the recession. This week’s trade and labour market data will garner some interest for fresh evidence of UK growth gaining momentum.
Pound Sterling – UK Markets
After a long haul, the Pound breached the 1.60 mark against the US Dollar in Friday’s session, as weak non-farm payrolls added credence to arguments that the Fed should adopt fresh easing measures in its monetary policy meeting this week. However, Sterling failed to emulate last week’s overall strength, as downbeat data from China and renewed worries over Greece prompted traders to seek shelter in the greenback.
Key indicators released in the recent past reveal that the British economy is steadily recovering from the recession and Friday’s monthly estimate of GDP from NIESR highlighted this fact, with the latest forecast suggesting that the UK economy grew 0.2% in the three months ending in August. In the backdrop of an apparent pick-up in economic activity, traders have begun scaling down hopes of more asset purchases by the BoE, which was also reflected in the central bank’s Chief Economist Spencer Dale’s recent comments, wherein he opined that more QE could be detrimental to the economy.
Apart from domestic data, Sterling is also expected to take cues from the Fed’s policy meeting and news flow from the Eurozone for further direction.
US Dollar – US Markets
The long-awaited non-farm payroll data indicated continued weakness in the US economy and has offered support to the belief that a fresh dose of stimulus is around the corner. Hiring in August was far below market estimates and figures for June and July were also revised lower. The US Dollar slid sharply against its peers in Friday’s session on QE hopes.
The greenback has started the week on a positive footing, as weak global economic data earlier today prompted traders to seek refuge in safe haven currencies. Industrial production growth in China continued to trend lower, while imports unexpectedly fell. On the other hand, a rise in consumer prices has hampered prospects of PBoC lowering interest rates. Risk aversion rose as fading prospects of Greece’s political parties agreeing to more spending cuts sparked fears of a default.
With risk sentiment taking a back seat in the initial stages of the week, markets are set to maintain focus on upcoming key events, which include the Fed’s monetary policy meeting and the German constitutional court’s verdict on Europe’s rescue fund.
Euro – European Markets
The Euro topped the 1.28 mark against the US Dollar on Friday, as weaker than expected non-farm payrolls data sparked hopes of fresh stimulus for the US economy. The Euro started today’s session on a weaker note, broadly due to worrying cues from China and Europe. However, losses have been limited, as data just released revealed that the Eurozone’s Sentix investor confidence climbed for September.
More clarity on the ECB’s bond-buying plan emerged, with the executive board member, Benoit Coeure, indicating that countries applying for the bond-buying scheme would not necessarily be asked to make fresh spending cuts. The ECB Chief’s plan also received support of the IMF.
However, the Greek Prime Minister failed to secure an agreement from his coalition partners on €11.5 billion worth of spending cuts, thereby jeopardising chances of the country’s lenders releasing funds for meeting Greece’s financial requirements. Moreover, the Troika has raised objection to certain provisions in the new austerity plan. Currency markets are expected to keep a close watch on the Fed’s policy meeting and German court’s verdict for more direction for risk sentiment.
Other Currencies – Highlights
The New Zealand Dollar declined against the Pound and the US Dollar, as traders shunned high yield currencies, amid growing worries over global growth prospects. Data revealed that industrial production in China grew at the slowest pace in three years, while room to alter interest rates diminished following an uptick in CPI for August. Additionally, concerns over Greece persist, as the nation’s political parties have failed to agree on the required austerity measures to seek the next instalment of the aid package.
However, the Kiwi Dollar outperformed high yield currencies in today’s session, as data from REINZ indicated that house prices and home sales continued to climb for August. On the manufacturing front, data revealed that manufacturing sales volumes rose modestly for the second quarter.
Apart from key economic releases, the Fed’s monetary policy decision later this week is expected to play a key role in deciding the trend for the Kiwi Dollar in the near future.
Sterling Rises on Hopes of EU Softening Tone on Backstop