Traders Tread Carefully

Traders have adopted a cautious approach in today’s trading session ahead of key events lined up for the week. The underlying trend is likely to remain, as three major central banks prepare to deliver their monetary policy verdict tomorrow. There is growing speculation that the BoJ could adopt further easing measures, while the ECB may embrace a more dovish stance. In contrast, simmering inflationary pressures are likely to prevent the BoE from restarting its asset purchase programme. With both manufacturing and construction PMIs struggling in the contraction phase, tomorrow’s services data will offer deeper insight into the UK economy. Meanwhile, today’s ADP employment report is likely to set the stage for the much anticipated labour market report on Friday.

Pound Sterling – UK Markets

Sterling backtracked against its peers and slipped close to the 1.51 mark against the US Dollar in yesterday’s trading session, after dire manufacturing PMI data dented market sentiment and renewed concerns over the UK economy registering negative performance in this quarter. Manufacturing PMI continued to remain in contraction territory for a second consecutive month, undermined by muted demand from domestic and overseas markets and subdued consumer confidence. Additionally, data out has revealed that construction PMI came in worse than expected for March, thereby limiting the upside for the Pound against the majors today. The onus has now shifted onto services data, scheduled for release tomorrow, for a clearer picture surrounding the British economy. Subdued services PMI readings are likely to put further pressure on the BoE to pursue additional stimulus measures at its monetary policy meeting scheduled tomorrow. Meanwhile, data revealed that shop price inflation ticked higher for March amid a rise in price for non food items. On account of a light economic calendar today, Sterling is likely to track news emanating from overseas markets for further cues on risk sentiment.

US Dollar – US Markets

Domestic macro releases had marginal effect on the US Dollar yesterday, as the currency was affected by developments in overseas markets. The greenback nudged higher against the single currency and the Pound, as subdued economic reports on the other side of the Atlantic dampened demand for riskier currencies. On the macro front, factory orders rebounded more than anticipated for February, buoyed by demand in aircraft industry and a sharp contrast to the recent ISM manufacturing PMI. In the midst of the US economy offering mixed economic results, the Fed Atlanta Chief opined that the central bank should wait and watch for several more months for further evidence that the economy is recovering before altering the pace of asset purchases. In this context, ISM services PMI and ADP employment data will be closely watched for insights into recovery. With the recent initial jobless claims trending upwards and manufacturing PMI bringing an end to the latest string of buoyant economic releases, softer readings in today’s session will likely prove negative for the US Dollar against the majors. Additionally, comments from a few Fed policymakers later today will be keenly watched for signs of an early withdrawal of the current monetary stimulus.

Euro – European Markets

The single currency has lost ground against the US Dollar this morning, as softer jobless and manufacturing activity data, released yesterday, stoked speculation that the ECB would loosen its monetary policy further in its meeting tomorrow. With today’s Eurozone inflation data expected to show an easing trend, the ECB has sufficient room to manoeuvre its monetary policy in order to reignite the ailing economy. There was further disappointing news for the Euro as the Cypriot finance minister, Michalis Sarris, resigned on Tuesday. Yesterday’s unemployment data doled out another negative surprise after data revealed that the region’s jobless rate rose to a record high for February, adding to fears that the currency bloc’s contraction might extend into the first quarter. Moreover, manufacturing data remained in contraction territory, heightening worries that tomorrow’s services PMI might also post dismal readings across Europe. However, there was some respite for traders, as Cyprus was granted two extra years to implement measures linked to its bailout and Italian and Spanish bond yields slid.

Other Currencies – Highlights

The Japanese Yen is trading in a tight range against the US Dollar in today’s trading session as investors remain on the sidelines ahead of the BoJ’s monetary policy meeting outcome due tomorrow. With the central bank holding its first policy meeting under a new Governor, it should be interesting to keep a watch on any fresh measures that the central bank adopts to spur the economy and beat deflation. Market participants believe that Haruhiko Kuroda, the new BoJ Governor and a vocal advocate of aggressive monetary easing, is likely to outline further easing measures tomorrow, thereby putting further pressure on the Japanese Yen against the majors. Apart from tomorrow’s crucial monetary policy meeting, the BoJ’s monthly economic report due on Friday will likely hold market interest, wherein the central bank is expected to shed light over the latest trends in the economy. The report is likely to be closely scrutinised to see if the recent monetary easing stance has proved beneficial in overcoming deflationary trends in the economy.