Market hopes of a further increase in the BoE asset purchase target has diminished considerably after the Deputy Governor opined that QE as an easing tool has become less effective. Moreover, the recent flurry of positive economic releases further validates the belief that the gloom surrounding the British economy is slowly receding.
Across Europe, traders breathed a sigh of relief yesterday after Spain pushed through key austerity reforms in it budget; an important move for securing a rescue deal with its European counterparts and which led high yield currencies to shift upward. Markets now await Moody's review of the Spanish sovereign rating due at the end of this month.
Pound Sterling – UK Markets
The Pound climbed against the US Dollar in yesterday’s trading session after data revealed that Britain's economy contracted less than expected in the second quarter, highlighting the recession as not being as bad as first thought. The optimism among market participants following Spain’s deficit reduction measures has continued to support gains in high yield currencies this morning and has led Sterling to register gains against the US Dollar. Additionally, buoyancy in retail sales was also reflected in GfK NOP’s consumer confidence reading, which climbed to a fifteen month high for September.
Meanwhile, latest comments from BoE policymakers have hurt the prospects of the central bank inducing a fresh round of easing in November. The BoE Deputy Governor, Paul Tucker, indicated that asset purchases are lacking the desired impact. Meanwhile the BoE policymaker, Paul Fisher, expects “a very strong Gross Domestic Product number” for the current quarter, further derailing hopes of more stimulus measures in the near future.
With no major releases scheduled today, markets will focus on data from the US and developments in the Eurozone for further cues.
US Dollar – US Markets
In the much anticipated Spanish budget, the government pushed through €40 billion of fresh austerity measures, despite the crisis surrounding the country. In the midst of the vulnerable state of the fiscal situation in Spain, the recent move has instilled some life into high yield currencies in today’s session, pushing the greenback lower against its major peers.
Meanwhile US second quarter GDP sprung a surprise, as growth for the quarter was lowered sharply. Moreover, durable goods orders plummeted for August, pointing to a sharp slowdown in factory activity. The dismal economic readings strongly support the Fed’s recent move to inject the new round of monetary easing. Meanwhile, some signs of stability emerged from the labour market after data revealed that a less-than-expected number of Americans sought jobless benefits last week.
Today’s personal consumption indicator is expected to maintain its positive trend, given the recent spurt in consumer confidence. Besides this, markets are also expected to keep a tap on events in the Eurozone for further direction.
Euro – European Markets
Following the recent battering, the Euro recouped some of its losses against the majors after the Spanish government unveiled its new austerity plan. Following weeks of dilly-dallying, Spain has eventually laid the groundwork to seek a bailout to stabilise its public finances.
Attention is now expected to shift towards Moody’s review of Spain’s credit rating, due at the end of this month. Taking a leaf out of Spain’s books the French President, Francois Hollande, is expected to unveil the nation’s toughest budget in 30 years in order to lower the public deficit. However, such measures could pose a threat to the nation’s growth, as data released today confirmed that the French economy stagnated for the second quarter.
Meanwhile, yesterday’s weak employment data followed by continued annual contraction in retail sales in Germany showed that the nation is not immune to the region’s debt crisis. Market participants stay watchful, given the possibility of a downgrade of Spain’s credit rating in today’s session.
Other Currencies – Highlights
The Japanese Yen strengthened against the US Dollar and Sterling, as Japanese firms continued to repatriate funds ahead of the end of the third quarter.
On the macro front, data revealed that the deflationary scenario in Japan persisted, leaving the door ajar for the Bank of Japan to undertake more easing measures in the future. Hopes of an intervention in the currency markets remain alive after Japanese Finance Minister, Jun Azumi, stated that his successor is likely to address the risks that Japan faces from a strong Yen.
Meanwhile the state of manufacturing remains worrying, as the latest PMI data revealed that manufacturing activity continued to contract for September. Weakness was also highlighted in industrial production data, which revealed a sharp fall for August. However, the positive impact of a declining unemployment rate was reflected in the upbeat retail sales and household spending figure.