Spain Plays the Waiting Game

With the ECB and the Fed playing their part in offering a window of opportunity for an economic recovery, the situation on the fiscal front is likely to remain the prime focus in the near term. Uncertainty over the possibility of Spain seeking an aid package continues to loom, as the nation’s finance minister ruled out further fiscal cuts required to qualify for the Eurozone rescue funding. Back in the UK, Rightmove indicated that the average asking price for homes in Britain continued to slide, albeit at a slower pace. Markets are expected to keep a tap on other important domestic macro releases slated during the week for further guidance.

Pound Sterling – UK Markets

Sterling moved higher against the US Dollar and breached the 1.62 mark on Friday amid optimism surrounding the third round of quantitative easing by the US Fed. Additionally, data indicated that UK’s construction activity grew 2.2% in July and fell less than expected for the second quarter. However, the Pound continued to lose ground against the Euro. In today’s trading session, the Pound is trading in a tight range against both the Euro and the greenback, as traders await key economic releases for more cues during the course of the week. Meanwhile, data from Rightmove revealed that the average asking price for a house in the UK fell for a third consecutive month in September. Among key releases for the week, markets are expected to eye inflation, retail sales and public finance data. Among other events of significance, minutes from September’s MPC meeting are expected provide the latest update on the BoE’s stance. With a dearth of releases scheduled today, traders are expected to position themselves for key events during the week.

US Dollar – US Markets

The weakness in the US Dollar against the majors showed no sign of abating in Friday’s trading session, as demand for safe haven currencies remained bleak following the Fed’s move to embark upon a new round of stimulus to revive economic growth. Moreover, key economic indicators justified the latest stance adopted by the Fed. Consumer price inflation stayed below the Fed’s target rate, providing ample scope for the Fed to initiate measures to lower the stubborn unemployment rate. Additionally, weakness in the economy was evident after data revealed a slowdown in retail sales growth and an unexpected fall in industrial production for August. The only silver lining was a sharp uptick in consumer sentiment for the current month. The greenback has recovered from the lows recorded after Fed’s announcement of fresh stimulus and has managed to post meagre gains against the Euro this morning. Meanwhile, Egan-Jones Ratings lowered its credit rating for the US by one level, citing that the recent easing measure by the Fed could be detrimental for the US economy. With markets looking for direction, the New York’s manufacturing index scheduled for release later today is expected to provide first insights into the manufacturing performance for September.

Euro – European Markets

The Euro’s recent rally has taken a breather, with the common currency trading lower against the majors this morning, as hopes of Spain seeking fresh aid from its European counterparts remains a distant reality. Despite the ECB changing the dynamics of debt problems in the Eurozone, growing calls for Spain to tap into the ECB’s life support fell on deaf ears. The Spanish finance minister expressed his objection for further fiscal cuts aimed to qualify for a Eurozone rescue. The rigid stance adopted by the Spanish government has prompted the ECB policymaker, Ewald Nowotny, to remind Spain upfront that the nation would have to make a formal application for aid before qualifying for inclusion in the ECB's plan to buy bonds of struggling Eurozone nations. Meanwhile, markets will be keeping a close watch on tomorrow’s German investor sentiment data and crucial PMI readings due for release later this week in order to gauge the impact on the region’s economy after the apparent change in market sentiment, following the ECB’s decision to intervene in bond markets.

Other Currencies – Highlights

The Kiwi Dollar has advanced against most of the major currencies this morning after the Westpac consumer confidence index in New Zealand rose for the third quartery. However, gains in the currency were limited after the Bank of New Zealand revealed that growth in the domestic service sector stalled for August. The Kiwi Dollar has also benefitted from the announcement of a fresh round of stimulus for the US economy. However, the focus is now expected to shift towards the stance that Spain plans to take in the near future. Markets are now expected to keep an eye on New Zealand’s second quarter GDP and current account balance data due later this week for clarity over the impact of the recent global slowdown on the domestic economy.