Fed to Remain Firm on QE Stance

Although recent US economic indicators pointed towards recovery, the kneejerk reaction in currency markets to a weak labour market report released on Friday is a result of market opinion that the Fed will continue with its current monetary stimulus for a prolonged period. Despite worrying signals from the UK economy, S&P affirmed its top notch credit rating on the nation. However, the threat of losing the coveted “AAA” rating remains, as the agency warned that any diversion to the government’s austerity programme could provoke a downgrade. With peripheral Eurozone nations once again proving a roadblock to the region’s recovery, signs of nervousness were visible as data showed a sharp drop in Sentix investor confidence index.

Pound Sterling – UK Markets

Sterling has shown resilience and is trading high against the US Dollar in today’s session, after dismal US non-farm payrolls data released on Friday fuelled speculation that the Fed would continue with its monetary stimulus programme for a longer than expected period. Further, S&P’s affirmation of the UK’s “AAA” credit rating also lent support to the Pound. However, the rating agency has maintained its negative outlook and warned that further deterioration in the nation’s fiscal and economic performance could likely cost the nation its coveted credit rating. Traders are expected to keep a tab on RICS house price balance and BRC retail sales data due early morning tomorrow for further cues on the economy. With recent retail sales data surpassing estimates, it will be interesting to see whether BRC data offers similar buoyancy. With a thin week ahead in terms of economic releases, trade balance data due tomorrow will be closely tracked in order to ascertain the economic impact of the recent weakness in Sterling. Additionally, industrial production and NIESR’s GDP forecast could also remain key trend setters for tomorrow’s session.

US Dollar – US Markets

Risk appetite received a boost in Friday’s trading session after US non-farm payrolls data indicated a slower pace of hiring. The greenback backtracked against the Euro and the Pound amid speculation that the Fed would continue with its unprecedented monetary easing measures. Against this backdrop, the FOMC minutes due later in the week could shed light over the path that the central bank might follow in its monetary policy meeting scheduled later in the month. However, the greenback has managed to recoup some of Friday’s session losses against the Euro this morning, as renewed concerns surrounding Portugal led traders to flock to safe haven assets. Meanwhile, data released on Friday revealed that consumer credit rose more than expected for February, signalling that consumer spending remains on track. In this context, the US Michigan consumer confidence and retail sales data due later in the week should garner market attention. With an apparently quite day ahead the Fed Chief, Ben Bernanke’s speech later today will likely hold market interest to gauge the direction of monetary policy in future.

Euro – European Markets

A dismal US employment report led the single currency to nudge higher and breach the 1.30 mark against the US Dollar in Friday’s trading session. Weak Eurozone retail sales for March failed to have any significant impact on the Euro. However, the common currency has come under pressure against the US Dollar this morning, as worrying signs in Portugal dampened sentiment among investors. The Eurozone Sentix investor confidence data just out has also revealed a sharp deterioration for April, putting further pressure on the Euro. In the midst of Portugal facing substantial headwinds, the nation’s high court rejected some austerity measures contained in the 2013 budget. This prompted the European Commission to warn that a failure to implement the agreed austerity measures would likely result in curtailment of future financial aid. However, in order to calm market nerves, the Portuguese Prime Minister later announced new cuts in social security, health programmes, education and state-run businesses. In today’ trading session, markets are keeping a tab on German industrial orders for February for further cues on risk appetite.

Other Currencies – Highlights

The Aussie Dollar has capped the upside against the greenback in today’s trading session after Australian Industry Group and Housing Industry Association indicated that construction activity contracted for the thirty fourth straight month for March, despite the RBA’s recent interest rate cuts. Risk appetite among market participants was also hurt after data showed a substantial decline in Eurozone’s Sentix investor confidence index for April. In the absence of major domestic economic data today, news emanating from external markets is likely to have a bearing on the Australian Dollar. Going forward, inflation expectations and unemployment data due later in the week will likely shed light over the state of the nation’s recovery. Additionally, traders are also expected to stay focused on a raft of economic data from China during the week, given its influence on the Aussie Dollar.