Is the US on Track?

Following the recent string of strong domestic economic data, yesterday’s upbeat retail sales report provided further evidence of the UK economy gaining momentum. Against this backdrop, the revised second quarter GDP data scheduled next week will be keenly followed by investors for further hints. Although yesterday’s economic data from the US was broadly mixed, improving prospects for the overall labour market and benign inflationary pressures could prompt the Fed to unwind a portion of its current monetary stimulus in the near term. Today’s consumer confidence and housing starts data will be closely watched and is expected to shed further light on whether the US economic recovery is broad based or not.

Pound Sterling – UK Markets

Upbeat domestic retail sales data and a lack of clarity among market participants with regards to the US Federal Reserve’s future policy stance propelled the Pound above the 1.56 level against the US Dollar yesterday. The UK economy has been showing firm signs of recovery and continued strength seen in domestic retail sales figures is further indication that even consumers are getting increasingly confident about the domestic economy. This also highlights the positive influence of the BoE’s loose monetary policy stance on consumers. In the absence of domestic economic triggers, the Pound is trading in a tight range against the US Dollar and the Euro in today’s trading session. Sterling is likely to take direction from some important US macro releases, including consumer sentiment and housing data, scheduled for release later today. Market participants are also looking forward to next week’s second quarter GDP data to ascertain the pace of recovery in the UK economy. Apart from the GDP report, public sector borrowing data is expected to influence market sentiment in next week’s trading session.

US Dollar – US Markets

The US Dollar weakened against its major peers in yesterday’s trading session amid continued doubts concerning the timing of scaling back the Fed’s $85 billion monthly bond purchase programme. Also, yesterday’s mixed bag of US economic data did little to ease market uncertainty. While initial jobless claims fell to the lowest level since October 2007 and consumer price inflation came in line with market expectations, lacklustre industrial production data and regional manufacturing indices dented investor confidence and dragged the greenback lower. In today’s trading session, market participants are expected to keep a tab on housing starts and building permits data, especially after yesterday’s data indicated improved home builder sentiment despite rising borrowing costs. Also, the Reuters/Michigan consumer sentiment index will be eyed for gauging consumers’ attitude towards the current economic environment. For the forthcoming week, the minutes of the last Fed policy meeting are expected to generate maximum market interest, especially following recent comments from some Fed officials on the central bank’s policy stance.

Euro – European Markets

Mixed US economic data raised uncertainty over the future course of the Fed’s monetary stimulus programme, lifting the single currency against the US Dollar in yesterday’s trading session. Moreover, growing hopes of a strong recovery taking effect in the Euro zone offered support to the common currency. The Euro hovered close to yesterday’s highs against the greenback in today’s trading session, as investors await cues from the US scheduled later today. Positive signals emerged from the European bond market, as spreads between peripheral and core Euro zone sovereign debt instruments continued to shrink, offering further signs of healing in the region’s economy following the recent spate of upbeat economic data from the Euro zone. However, with elections in Germany approaching, the German Chancellor Angela Merkel launched her election campaign by expressing concerns over increasing reliance on debt by the European nations. Meanwhile, today’s CPI data from the Euro zone is likely to confirm that inflationary pressures remain fairly anchored for July. Going forward, manufacturing PMIs across the Euro zone due next week will be keenly eyed and will shed further light over the region’s recovery.

Other Currencies – Highlights

The Swiss Franc advanced against the US Dollar in yesterday’s trading session after a rather mixed set of economic indicators from the US confounded market participants on the likely timing of the Fed’s QE3 tapering. The rise in the Swiss Franc can also be attributed to the recent strength shown by the Swiss economy, as indicated by this week’s upbeat retail sales data and a further improvement in ZEW economic confidence. With no domestic economic releases on tap today, market sentiment will be driven by some crucial economic releases from both sides of the Atlantic. Also, with a relatively light Swiss economic calendar next week, with trade balance being the only major macro data, news flow emanating from across the globe is likely to sway investor sentiment in the Swiss Franc against the majors.