UK Recovery Remains on Track

The downside for high yield currencies looks limited in today’s trading session, as encouraging Chinese macro data boosted hopes of a recovery in the world’s second largest economy. There is little on the macro calendar going forward today to drive risk appetite. With a busy week coming to an end, all eyes are set on the European GDP releases due next week for cues on the performance of the region’s economy. Back in the UK, data just released has revealed that trade deficit narrowed more than expected for June, strengthening perception that the nation is marching on the path to recovery. Moreover, recent upbeat macro numbers has led the OECD to raise its outlook for the UK yesterday.

Pound Sterling – UK Markets

In an otherwise lacklustre day in terms of domestic economic releases yesterday, Sterling climbed against the US Dollar following a rise in US initial jobless claims last week. Meanwhile, economic releases from the UK have continued to present a brighter picture of the nation’s growth prospects. Data just out has revealed that the trade deficit in the UK narrowed for June, primarily due to a rise in exports. This comes on the back of upbeat Chinese data and should support the Pound against the US Dollar in today’s trading session. However, Sterling is trading in a tight range against its European counterpart today. Meanwhile, with the BoE explicitly linking interest rates to a fall in the unemployment level, the labour market report as well as consumer inflation data due next week will gain increased market attention for gauging the policy stance the central bank might take in the near future. Apart from this, retail sales and the BoE minutes due next week are also expected to hold relevance for currency markets.

US Dollar – US Markets

With uncertainty in regards to the Fed’s policy stance ruling the roost, there is growing anxiety that the Fed could scale back its QE3 programme during the latter half of 2013. Although the last Federal Reserve policy meeting gave no clear indication on the central bank’s likely policy stance, comments from four Fed officials over the last few days, the latest being the President of the Dallas Fed, Richard Fisher, hint at greater intent to taper the monetary stimulus programme in the September meeting. Meanwhile, upbeat Chinese industrial production data has limited the greenback’s upside against the Euro and the Pound in today’s session. With no major domestic releases on offer today, attention is expected to shift to an array of key economic releases including industrial production, retail sales, initial jobless claims, housing starts and building permits next week for insights into the strength of the nation’s recovery. Additionally, consumer price inflation data also features in the next week’s calendar and will be tracked closely, considering its influence on the Fed’s future policy moves.

Euro – European Markets

The single currency moved higher against the greenback yesterday, as markets continued to reassess the possibility of the US Fed scaling back its ultra loose policy stance following a rise in US initial jobless claims. “Risk on” sentiment has remained well anchored in today’s trading session after the Chinese economic data painted an upbeat picture of the nation’s growth trajectory. However, despite the recent macro data offering signs of revival in the Euro zone economy, the ECB, in its monthly report yesterday, lowered its growth forecast for the current year, citing continued downside risks to the bloc. Against this backdrop, a raft of GDP data across the Euro zone, including Germany and France, are the key macro highlights for the forthcoming week and will set the trend for the common currency. With this week’s Spanish and Italian GDP data showing a slower pace of contraction, there is a strong possibility that the next week’s Euro zone GDP report will echo similar results. Apart from the GDP data, the Euro zone industrial production and the German ZEW sentiment indices remain key events that have the potential to stir risk appetite.

Other Currencies – Highlights

In its quarterly monetary policy statement, the Reserve Bank of Australia downgraded the nation’s economic growth forecast for 2013 to 2.25% from 2.5% estimated earlier, citing a declining mining investment boom and slower consumer spending and construction activity. The central bank further added that it will adjust the monetary policy as warranted by the economic landscape. Despite a downbeat view offered by the central bank, the Australian Dollar climbed against the greenback in today’s trading session, as China, Australia’s largest trading partner, revealed a better than expected improvement in industrial production, thereby adding to optimism that the economy may be stabilising. However, with the Australian economy grappling with domestic economic woes, it remains to be seen how long the Aussie Dollar is able to hold on to its gains. In the forthcoming week, with no major economic releases apart from Westpac consumer confidence and consumer inflation expectations featuring on the nation’s economic calendar, the Australian Dollar is expected to track overseas developments for further direction to risk appetite.