UK Continues to Accrue Debt

The public sector borrowing data just released has reaffirmed the prevalent view that the British government is steadily veering away from its fiscal goals. However, the BoE Governor stated that the Chancellor could revise his fiscal targets in the midst of gloomy global economic conditions. However in contrast, yesterday’s retail sales data and industrial orders survey have further strengthened the view that the British economy is gathering pace. Meanwhile, risk remains supported this morning amid reports that Greece is inching closer to seal a deal with its creditors while Spain may tap fresh assistance next week. Against this backdrop, today’s meeting between Italian and Spanish leaders holds significance.

Pound Sterling – UK Markets

The Pound gained against the Euro in yesterday’s trading session following dismal PMI readings across the Eurozone. Additionally, data revealed that annual retail sales in the UK continued to climb for August. Moreover, the recent improvement in manufacturing PMI readings was reflected in the CBI’s trend survey which revealed a sharp jump in industrial orders for September. Buoyed by the optimism, Sterling has continued to maintain its yesterday’s resilience against the majors this morning, as recent economic indicators continued to portray a brighter picture of the British economy. However, data just in has revealed that the public sector net borrowing climbed for August, further denting chances of the British Chancellor meeting his fiscal targets. Calls for abandoning austerity measures have grown louder, with the BoE Governor stating that it might now be "acceptable" for the government to miss its fiscal goals, owing to the dire state of the global economy. Meanwhile, the central bank head insisted that the asset purchase programme was still effective. With a relatively calm day ahead, traders are expected to prepare themselves for next week’s second quarter GDP data.

US Dollar – US Markets

The US Dollar has reversed some of its gains against the Euro in today’s session on reports that Greece is moving closer to seal an agreement with its creditors in order to unlock its next aid tranche while Spain may seek assistance soon from the EU authorities. Moreover, Minneapolis Fed President, Narayana Kocherlakota, has switched sides as he stated that the central bank should maintain interest rate at near zero levels until the unemployment rate has fallen below 5.5%. However, St. Louis Fed President, James Bullard, opposed the stance of using monetary policy to set a target for the unemployment rate. On the macro front, initial jobless claims unexpectedly climbed last week, reflecting the weakness in the labour market and supporting the stance adopted by the Fed. However, the Philadelphia Fed’s manufacturing index rose more than expected, starkly in contrast to the New York’s manufacturing index data released earlier in the week. With no economic releases scheduled during the today, developments in the global economy would hold significance in determining the near term trend in the greenback against the majors.

Euro – European Markets

The poor state of manufacturing activity across Europe exerted pressure on the Euro against both the US Dollar and Sterling in yesterday’s trading session. However, recent developments in Spain and Greece aided the Euro to arrest its decline against the US Dollar this morning. Reports emerged that Spain would seek assistance from its European counterparts in the near future, while Greece moved closer to seal a long awaited deal with its creditors for tapping the next round of funds. However, growth worries remain a concern, as the Italian government slashed its growth forecast for the current year and the German finance ministry warned of a slowdown in growth during the latter half of 2012. In an attempt to calm market nerves, the IMF Chief, Christine Lagarde, indicated that Spain requires less money for recapitalising its banks than widely speculated. Today’s meeting between the Spanish Prime Minister, Mariano Rajoy and his Italian counterpart, Mario Monti, will remain a key event on radar for more clarity on the stance that Spain plans to adopt in dealing with its fiscal problems.

Other Currencies – Highlights

Yesterday, the Canadian Dollar slipped against the greenback, on global growth concerns after data revealed that manufacturing activity in China and the Eurozone continued to contract for September. However, reports of debt extension in Spain and Greece have turned the tide in favour of the Canadian Dollar in today’s trading session. Reports revealed that Spain is moving closer to seeking more aid, while Greece is on the verge of finalising its terms for the next aid tranche. The Canadian Dollar is also supported by a recovery in crude oil prices. On the macro front, consumer price inflation due later today is likely to be keenly eyed and is expected to ease marginally for the previous month. Besides, next week’s retail sales data would also feature among important economic releases for the Canadian Dollar against the majors.