UK Recovery Gathering Momentum

GDP data released across major European economies earlier today has validated the belief that the Euro zone economy in on the mend. With growth figures from Germany and France surpassing market estimates, market participants believe that the Euro zone GDP reading due later today could also reveal a similar buoyancy. Across the Atlantic, yesterday’s encouraging US retail sales has once again brought the US Fed tapering talks to the forefront. Back at home, the BoE minutes has revealed that policymakers unanimously agreed to leave policy measures untouched. With data just out showing a more than expected improvement in the labour market, Sterling has breached 1.55 levels in trading today. The possibility of Carney’s unemployment threshold reaching sooner than expected remains on cards.

Pound Sterling – UK Markets

The minutes of the BoE’s last policy meeting just out has revealed that MPC members unanimously voted to keep monetary policy unchanged. The Pound has strengthened against the majors after a volatile session yesterday, as data revealed a more than expected improvement in the domestic labour market. Data just released has indicated that the number of people seeking unemployment benefits declined more than estimated for July. Sterling has risen sharply following the release although upbeat GDP data from Germany and France limited its upside against the Euro. With yesterday’s consumer inflation data revealing that inflation continued to hover well above the central bank’s target rate, it remains to be seen how long the central bank plans to continue with its accommodative policy stance. The mild weakness in Sterling witnessed yesterday was also a result of modest US retail sales data, which fuelled speculation that the Fed’s bond buying programme could end sooner than envisaged. Apart from developments taking place in overseas markets, retail sales data in the UK due tomorrow is likely to entice investors focus on domestic cues.

US Dollar – US Markets

Although yesterday’s retail sales data revealed that growth was slightly weaker than expected due to a notable drop in auto sales, sales rose for the fourth consecutive month for July, adding to hopes that consumer spending could propel the nation’s recovery going forward. The US Dollar gained traction against the Euro, as the widely watched indicator further added to speculation that the US Fed might scale back its bond purchases in the near future amid improving economic outlook. The US Atlanta Fed President, Dennis Lockhart, indicated that although inconsistent economic data has hampered the central bank’s ability to lay out a detailed path for scaling back asset purchases, the possibility of a stimulus pullback in September cannot be ruled out. Meanwhile, positive news flows from the Euro zone has arrested the greenback’s upside against the single currency in today’s trading session. Market participants are expected to watch producer price inflation data due later today ahead of the consumer price inflation report due tomorrow for insights into the nation’s latest price trends. Additionally, comments from the St. Louis Fed President, James Bullard, scheduled later today is likely to generate market interest.

Euro – European Markets

The Euro has limited its downside against the majors this morning after German and the French GDP reports surpassed market estimates. Data revealed that Germany recorded its strongest economic expansion amongst the world's largest industrialised nations while France moved into the expansion phase for the second quarter of 2013. These positive reports have fed into optimism that the Euro zone GDP data later today might also offer upbeat news. Meanwhile, yesterday data revealed that Euro zone industrial production rebounded for June. Moreover, the ZEW sentiment indices in Germany and the Euro zone showed significant improvement for August, suggesting that that a downturn in the Euro zone economy might be receding and the region might gain further momentum for the third quarter. However, the Euro failed to move higher against the majors, as encouraging US retail sales numbers once again spurred speculation of the US Fed scaling back its stimulus measures sooner than expected. With little on offer from the US today, market sentiment in the Euro is likely to be governed by the Euro zone GDP data due later today.

Other Currencies – Highlights

Although the Kiwi Dollar weakened against the greenback yesterday after a rise in US retail sales, the currency has managed to recoup most of its losses in today’s trading session following buoyant domestic retail sales data. Data revealed that on a sequential basis, retail sales in New Zealand rose more than anticipated for the second quarter of 2013 on account of strong demand for food and beverages. A pick-up in economic activity following robust retail trade volume will allow the Reserve Bank of New Zealand to hold its record low interest rates for the rest of the year. Going forward, markets are expected to keep a close watch on the domestic manufacturing PMI data due overnight for further confirmation that the economy is treading the recovery path. The ANZ consumer confidence data tomorrow is also expected to garner modest attention to decipher whether retail sales will replicate similar performance for the third quarter. While domestic cues holds relevance, events unfolding in overseas markets will also have a bearing on the Kiwi Dollar’s demand against the majors during this week.