German Court Pulls the Strings

The German Constitutional Court ratified Germany's contribution to the ESM, but added a key rider with a stipulation that a cap of about €190 billion be set on German liability under ESM, unless parliament decides to back extra funds. However, high yield currencies have maintained their gains as the judgement came as a relief, since it is expected to aid the ECB in launching its newly formulated bond-buying programme. Moody’s indicated risks to the AAA rating of the US if policymakers fail to address issues related to the nation’s soaring debt levels. In Britain, data today revealed an unexpected fall in the number of people seeking jobless benefits.

Pound Sterling – UK Markets

The latest employment data revealed that the UK’s claimant count fell sharply for August, vindicating widespread belief that the UK economy is emerging slowly from recession. The Pound continued its dominance against the US Dollar and moved closer to the 1.61 mark in yesterday’s session, after Moody’s indicated that the US credit rating could be downgraded if policymakers fail to address issues pertaining to the country’s fiscal situation. Moreover, data revealed that trade deficit in the UK narrowed more than expected in July, driven by record exports outside the EU. The newly appointed BoE policy maker, Ian McCafferty, voiced his support for the UK Chancellor, George Osborne’s austerity programme and on the monetary policy front he indicated that decisions on further monetary stimulus would hinge on more evidence about the state of the British economy. With the jobs data out, markets are expected to turn their attention towards tomorrow’s monetary policy meeting in the US for more cues.

US Dollar – US Markets

The US Dollar maintained its downward trend against the Euro, as positive cues sparked a “Risk on” rally among high yield currencies. Reports revealed that Spain is considering seeking fresh aid, while the Chinese Premier, Wen Jiabao, hinted at new stimulus measures and vowed to meet the nation’s official economic growth targets. Additionally, Germany's Constitutional Court approved Germany’s contribution towards ESM, thereby aiding the ECB to begin its recently formulated bond buying plan. Meanwhile, the precarious fiscal situation in the US remains a cause of concern, as Moody’s echoed Fitch’s earlier warning that it would lower the “AAA” rating of the US economy if policymakers fail to tackle problems on the fiscal front. A solution to the problem remains elusive, with a key Republican member, John Boehner, expressing his doubts over the possibility of escaping the "fiscal cliff" that threatens the economy. Meanwhile, with the Fed’s two day monetary policy meeting commencing today, traders are expected to stay cautious given the uncertainty over the Fed’s decision.

Euro – European Markets

The Euro is trading higher against the US Dollar and sterling, as traders continued to digest the German court’s decision on the validity of the ESM. Although the judgement was broadly favourable, the German court’s prescription for an upper limit on German contribution to ESM could curtail Germany from playing a bigger role in dealing with the crisis. The Euro rallied against its peers in yesterday’s session, as reports emerged that Spain is considering taking support from the ECB’s bond buying plan, but may stop short of seeking a full blown sovereign bailout. Meanwhile, in the midst of widening fissures among Eurozone policymakers, tomorrow’s election in Netherlands would hold significance, given the constantly changing political landscape in the Eurozone. On the data front, France’s current account deficit narrowed more than expected, while Italian industrial production continued to contract, albeit at a slower pace. The Euro is expected to closely track risk sentiment among market participants following key events from the Eurozone and the US.

Other Currencies – Highlights

The Japanese Yen declined against its peers in today’s session, after the German court ratified the ESM, albeit with some clauses limiting Germany’s role in dealing with the debt crisis. Moreover, traders also remain hopeful that weak economic releases from the US in the recent past could prompt the Fed to embrace fresh easing measures in its monetary policy decision tomorrow. On the data front, machine orders improved for July, while the monthly domestic corporate goods price index recovered for August. Markets will be keenly watching Friday’s industrial production figures for further cues on the domestic front. In the absence of any major releases for the week, the Japanese Yen is expected to be closely influenced by news flow emanating from the Eurozone and the US in the next two days.