Calm before the Storm?

A lack of global macro releases resulted in a subdued trading session yesterday, as markets await the minutes of the Fed’s latest policy meeting due tomorrow. With uncertainty being the norm lately, the Fed minutes are expected to provide a definite direction to market participants with regards to future monetary policy. Across Europe, the Euro found some support yesterday after Germany’s Bundesbank indicated that the ECB may hike interest rates in order to restrain potential inflationary pressures. On the domestic front, public sector net borrowing and the CBI industrial trends survey, scheduled for release tomorrow, will be on investors’ radar.

Pound Sterling – UK Markets

Sterling showed resilience against the greenback yesterday on the back of recent upbeat domestic economic data, suggesting that the British economy is set for a steady recovery beyond the prolonged recessionary phase. However, lingering uncertainty over the timing of the potential unwinding of the Fed’s bond purchase programme capped the upside for the Pound. Developments across the Atlantic over the past few weeks have made markets jittery, with indecisiveness being the primary sentiment among investors. Meanwhile, the Pound is trading in a tight range against the greenback and the Euro in today’s trading session. In the absence of major economic triggers at home, traders are looking forward to tomorrow’s public sector net borrowing report, which is expected to show a surplus, thereby indicating that the government is managing its finances well. Also, the CBI’s industrial trends survey will gain modest market attention. However, the Fed minutes scheduled tomorrow will undoubtedly remain the key determinant for risk appetite, as it will provide hints on the Fed’s policy stance in the near future.

US Dollar – US Markets

With tomorrow’s minutes of the Fed policy meeting on the horizon, market participants remain cautious in a restrained trading session today. With recent economic indicators unable to provide a definite direction for the next policy move, markets are looking forward to the minutes to shed some light on the same. While the Fed Chairman, Ben Bernanke, chose not to spill the beans on the timing of the Fed’s tapering plans at the last policy meeting, various Fed officials thereafter have gone on record indicating that the ultra loose policy measures may be nearing an end. Any indication of tapering QE3 at the September meeting could trigger capital flight and may weigh heavily on riskier currencies. Jacob Lew, the US Treasury Secretary, has called for Congress to raise the government’s debt ceiling without the hassles of 2011, citing the current healthy economic environment. Meanwhile, another subdued session is in the offing today, with the Chicago Fed national activity index being the only major economic indicator scheduled for release. Apart from tomorrow’s Fed minutes, existing home sales data in the US will be eyed for further direction to risk appetite.

Euro – European Markets

In a rather quiet day in currency markets yesterday, the common currency traded in a tight range against the US Dollar and the Pound amid a lack of decisive domestic triggers. However, downside risks in the Euro were limited after the German Bundesbank‘s monthly report indicated that the ECB’s pledge to keep borrowing costs low will not deter the central bank from raising interest rates in case inflationary pressures flare up. Against the backdrop of recent buoyant economic data, traders are looking forward to the Euro zone construction output later today for gauging the strength of the currency blocs’ construction sector. However, tomorrow’s minutes of the Fed’s last policy meeting are likely to play a pivotal role in determining direction to risk sentiment. Additionally, markets are keeping a close eye on the manufacturing and services activity data across Europe due later this week, which may provide further evidence of the region’s strengthening recovery from a six-quarter contraction.

Other Currencies – Highlights

The Aussie Dollar moved lower against the majors this morning after minutes of the RBA’s policy meeting revealed that the central bank would prefer a weakening Australian Dollar to support rebalancing of the economy. Policymakers also opined that although an imminent rate cut is not necessary, the central bank will not rule out the possibility of lowering borrowing costs in the future to support the economy. A benign inflation outlook has also kept the door ajar for additional rate cuts, as a slump in mining investment poses a stiff hurdle to growth. The RBA had cut its key lending rate to a record low of 2.5% at its last policy meeting after a spate of dismal economic data raised fears of a flagging economy. Going forward, traders will keep a tab on the Westpac leading index early morning tomorrow for further insights on how the economy is likely to perform in the near future. Also, news flows emanating from both sides of the Atlantic will determine risk appetite among market participants.