Markets Brace for Volatility

After weeks of speculation over the Fed’s future policy stance and with a recent set of mixed US economic data confounding traders, the minutes of the July FOMC meeting later today are expected to lift the veil of uncertainty prevalent in markets. However, volatility arising from this crucial economic event cannot be ruled out in today’s trading session. On the domestic front, data just out has shown that the UK public sector balance posted a deficit for July. Besides, today’s UK CBI industrial trends survey and tomorrow’s PMI releases from the Euro zone will offer further direction to currency markets this week.

Pound Sterling – UK Markets

The Pound continued its run against the US Dollar, touching its two-month high and briefly threatening to breach the 1.57 mark yesterday, on back of improving confidence in the UK economy. With markets remaining on edge ahead of some expected clarity on the Fed’s future policy stance, Sterling is trading in a tight range against the majors in today’s trading session. Meanwhile, the public finances report just out has revealed a less than expected budget deficit for July, providing some respite to the UK Chancellor. Going forward, market participants will closely watch the CBI industrial trends survey for insights on trends in economic recovery during the initial phase of the third quarter. Apart from the domestic cues, Sterling will also be influenced by the minutes of Fed’s latest policy meeting later today.

US Dollar – US Markets

In a rather quiet trading session yesterday, the US Dollar lost ground against both the Pound and the Euro before settling down to trade in a tight range, as uncertainty regarding the Fed’s next policy move weighed on the performance of the safe haven currency. Traders have refrained from building fresh positions in currency markets this morning ahead of release of the policy meeting minutes later today. Meanwhile, the Chicago Fed national activity index released yesterday rose less than expected for July, adding to the recent mixed bag of US economic data. While the Fed minutes will be closely monitored for hints on QE3 withdrawal, existing home sales data will be eyed to ascertain the extent of recovery in the US housing sector. Market participants are expecting heightened volatility following the minutes, as any indication of QE3 tapering in the September meeting could weigh heavily on the performance of high yield assets and vice-versa. Also, tomorrow’s manufacturing PMIs across Europe and the US will give further direction to risk appetite.

Euro – European Markets

The Euro-US Dollar pair rose to near six-month high yesterday but further gains were capped amid continued speculation on the timing of the Fed’s QE3 tapering. The common currency’s strength can be attributed to data released during the past few weeks which showed that the battered Euro zone economy returned to growth in the second quarter after a prolonged recession. Moreover, yesterday’s construction output data revealed modest monthly improvement in the region’s construction sector for June. Meanwhile, the single currency is looking for direction against the US Dollar in today’s trading session, as markets anxiously await the release of the Fed’s latest policy meeting minutes. Uncertainty continues to haunt markets, as traders are unsure of the US central bank’s next policy move and today’s minutes are expected to offer cues on the Fed’s QE tapering strategy. With no major domestic economic data on tap today, the Euro will take direction from developments taking place across the Atlantic. Also, traders will keep a close eye on the manufacturing and services PMIs of major Euro zone economies tomorrow for further insights into the Euro zone growth story.

Other Currencies – Highlights

The Swiss Franc is trading under pressure against the US Dollar this morning, as investors await the release of the minutes of the Fed’s latest monetary policy with baited breath. Investors are now speculating on the amount of bond purchases that the US central bank might cut this September rather than the timing of the stimulus scale back. Meanwhile, the Swiss National Bank’s monthly statistical bulletin released today morning showed that the Switzerland’s current account surplus increased to 11% of the nation’s GDP in 2012. Against this backdrop, the trade balance report due tomorrow will provide further indication about the health of the Swiss economy. With little on the domestic economic calendar apart from the trade data this week, market participants will keep an eye on the UBS consumption indicator due next week for early insights into the nation’s growth prospects in the latter half of the year.