QE3 Keeps Policy Makers On Board

The minutes of the Fed’s latest policy meeting suggested a partial withdrawal of the Fed’s asset purchases programme later this year, as policymakers largely supported the Chairman’s tapering plan, leading to broad weakness in high yield currencies. Moreover, with the housing sector showing a sustained recovery, the possibility of scaling back QE3 in September cannot be ruled out. At home, yesterday’s economic data was a mixed bag, as public finances showed a deficit while industrial orders climbed for August. Today’s Euro zone manufacturing and services PMIs indicate that the currency bloc is well on its way for a sustained recovery. Meanwhile, important macro releases from across the Atlantic is expected to influence market sentiment in today’s session.

Pound Sterling – UK Markets

The recent upward momentum in the Pound against the greenback was arrested yesterday after the Fed minutes showed a broad consensus among policymakers for a gradual reduction of bond purchases later this year, if the economy continues to improve. On domestic front, the UK public finances report released yesterday showed a deficit for July. However, UK factory orders for August rose to a two-year high, suggesting that the overall manufacturing activity remains strong. Although the British economy continues to show signs of revival, the MPC member, Martin Weale, indicated that the central bank will not shy away from resorting to further asset purchases, if the economy shows signs of stalling. In today’s trading session, the Pound is trading close to the 1.56 mark against the US Dollar. Sterling has also weakened against the Euro this morning after manufacturing and services PMIs in Germany and the Euro zone beat market expectations. With no major domestic economic triggers on tap today, news flows emanating from across the Atlantic looks set to dominate near-term market dynamics. Also, tomorrow’s revised second quarter GDP report in the UK will hold interest for Sterling investors.

US Dollar – US Markets

After the recent spell of weakness, the US Dollar moved higher against its major peers yesterday after minutes of the July Fed meeting showed that policymakers were “broadly comfortable” with Ben Bernanke’s tapering timeline, provided the economy continues to improve. The minutes provided some respite after weeks of uncertainty concerning the Fed’s future policy stance. Additionally, existing home sales for July jumped to their highest level since November 2009, indicating that rising mortgage rates had no major impact on the housing demand in the US, thereby further boosting the case for a reduction in stimulus measures. The greenback has continued to trade on a stronger footing against the Pound in today’s trading session ahead of the jobless claims data due later today which is expected to show a rise in claims last week. Furthermore, today’s manufacturing PMI will be eyed for gauging the strength of the manufacturing sector. Also, news flows emanating from the annual Economic Symposium at Jackson Hole will gain market attention.

Euro – European Markets

The Euro zone looks well set for a sustained phase of economic growth following a prolonged recession. An improvement in today’s manufacturing and services PMIs in Germany and the Euro zone chimes with the recent set of upbeat economic data over the past few weeks, boosting the region’s growth outlook. This has limited the downside risks in the common currency against the US Dollar in today’s session, paring yesterday’s losses following the Fed minutes. The minutes revealed that policymakers in the US were supportive of the Fed Chairman’s plan to scale back monthly bond purchases, if the economy continued to improve. With major domestic economic releases out for the day, market participants will eye the US housing, initial jobless claims and manufacturing PMI data later today for further cues on the overall economic growth in the world’s largest economy. Also, the three-day annual Jackson Hole Symposium commencing today will be keenly followed by investors and has the potential to sway market sentiment.

Other Currencies – Highlights

The Australian Dollar has edged higher against the greenback this morning after surprisingly upbeat Chinese manufacturing PMI hinted towards a strengthening economy after consecutive quarters of slowdown. However, domestic economic data continued to disappoint, as the Conference Board’s leading economic index released overnight painted a bleak picture of the Australian economy for the near future. Meanwhile, the last Fed policy meeting minutes released yesterday revealed that the central bank was close to partially scaling back its stimulus measures. In the absence of any major economic releases today, the Aussie Dollar will take direction from developments taking place in the US. Also, Australia’s private sector credit and expenditure data due next week will be eyed by market participants for further direction to the Australian Dollar against the majors.