Markets Gear Up for Critical Week

Market sentiment remains subdued in today’s trading session, as weak second quarter GDP data from Japan suggested that the economy is yet to witness a fully fledged recovery. Against this backdrop, GDP data from key Euro zone economies during this week will hold market interest. Additionally, a raft of US economic releases due this week will be gauged closely for deciphering the US Fed’s future policy stance with regards to QE3. With little on the global economic calendar today, Sterling investors are likely to shift focus on to tomorrow’s consumer price inflation data for further direction. Moreover, the labour market report will gain increased market attention, especially after the BoE’s recent decision to link its policy stance with the labour market.

Pound Sterling – UK Markets

The Pound failed to gain traction against the US Dollar and the Euro on Friday, as an indecisive environment regarding global central bank policy stance in the near future prevailed in markets. The weakness has persisted as the Pound began today’s trading session on a weaker footing against the greenback. Meanwhile, domestic data continued to spring positive surprises, with Friday’s data showing that trade deficit narrowed in June on the back of record goods export to China in the second quarter. With tomorrow’s consumer price inflation data expected to reveal an easing trend for July, the upside for the Pound looks limited in the near term, as cooling price pressures will offer additional scope to the BoE to continue with its accommodative stance. Meanwhile, the labour market report and retail sales figures due later this week are expected to provide further clarity regarding the state of economic recovery in the initial phase of the third quarter. The BoE minutes due on Wednesday will also be tracked closely for insights into the issues playing on the minds of policymakers in the midst of an easy policy stance adopted by the BoE.

US Dollar – US Markets

“Risk off” sentiment following weak second quarter GDP data in Japan has helped the US Dollar to gain strength against the Euro and the Pound in today’s trading session. However, gains remain capped, as market participants remain watchful of crucial US economic releases scheduled during the week which will offer further cues on whether the Fed might scale back its ultra loose monetary policy in the near future. Although regional manufacturing indicators will be closely monitored for signs of pickup in manufacturing activity, the prime focus remains on retail sales, consumer price inflation, industrial production and consumer sentiment data, given their strong influence on the central bank’s monetary policy decisions. Steady signs of revival across sectors will rekindle speculation of an early withdrawal of QE3, thereby aiding the US Dollar against the majors. In today’s trading session, markets are expected to monitor the US monthly budget statement for gauging the efficacy of the US government’s tight fiscal measures. Apart from the domestic releases, trading sentiment is expected to be governed by news flows emanating from across the globe, especially the Euro zone during this week.

Euro – European Markets

A slower than anticipated pace of growth for the Japanese economy during the second quarter of 2013 has kept a tight lid on the demand of high yield currencies, leading the single currency to register losses against its US counterpart in today’s trading session. Traders keenly await the equivalent data from Germany, France and the Euro zone due midweek in order to ascertain the pace of recovery in the region. In line with the recent strong performance from the battered economy, the GDP data is expected to reveal that the region moved into expansion territory for the first time since 2011. The upbeat data will help in strengthening the belief that the region is poised to recover in the latter part of the year and bodes well for the single currency’s performance against the majors during this week. Apart from the GDP data, the Euro zone industrial production and the German ZEW sentiment indices data due tomorrow is also expected to be keenly eyed for further insights into the region’s recovery prospects. With an apparently light European economic calendar today, cues emanating from overseas markets are set to dominate dynamics of the single currency.

Other Currencies – Highlights

The Japanese Yen has retreated against the Euro and the US Dollar in today’s trading session after data revealed that the economy witnessed a slower than expected pace of expansion for the second quarter of 2013, primarily due to a fall in capital expenditure, suggesting that industrial demand remains elusive despite the feel-good factor generated by the Prime Minister’s reflationary policies. Soft GDP numbers have further generated an air of uncertainty over a planned sales tax hike. In this context, Etsuro Honda, a prominent adviser to Prime Minister, Shinzo Abe, endorsed that it is unlikely that the government will go ahead with sales tax hike to ensure the country makes a sustained recovery from deflation. On account of a light global economic calendar today, market participants will keep a tab on the minutes of the Bank of Japan’s latest policy meeting scheduled for release early morning tomorrow for hints on the central bank’s outlook for the economy. Also, a slew of economic releases from both sides of the Atlantic throughout the week will keep markets interested and play a pivotal role in determining investors risk appetite.