The Carney and Draghi Show

In the midst of looming concerns over political instability in Portugal, weak PMIs and record high unemployment in the Euro zone, markets look forward to the ECB meeting today wherein the task of Mario Draghi to drive the economy out of the doldrums is becoming increasingly difficult. Meanwhile, with yesterday’s UK services PMI climbing to multiyear highs for June, the BoE’s policy meeting due later today is likely to be a low key affair, as the central bank is expected to maintain the status quo amid an improving economic landscape. However, Mark Carney’s first vote as the new Governor will garner market attention. With US markets closed today, tomorrow’s crucial monthly jobs report holds interest, especially after yesterday’s robust ADP employment data.

Pound Sterling – UK Markets

The dominant UK services sector gave a stellar performance yesterday, leading the Pound to outperform and breach crucial levels against both the Euro and the greenback yesterday, though some gains in the Sterling-Euro pair can also be attributed to the political turmoil in Portugal and weak services PMI data in the Euro zone. Yesterday, data revealed that the UK services sector, which accounts for nearly three quarters of the economy, expanded for June at the fastest pace in more than two years. With the recent economic releases across all major sectors suggesting that the fledging UK economic recovery is gathering pace, the BoE is unlikely to offer any surprises in its monetary policy meeting due later today. Buoyant economic data has also ward off market speculation that the new BoE Governor may push quickly for more monetary stimulus. However, his views regarding future economic prospects and inflationary pressures could act as a catalyst for the near term dynamics of Sterling against the majors. Apart from the BoE’s policy stance, the ECB’s post-meeting press conference has the potential to sway market sentiment in today’s trading session.

US Dollar – US Markets

A slew of key economic data released yesterday provided a mixed picture of the US economy and further confounded traders over the nation’s growth trajectory. Data indicated that the nation’s services sector expanded at a much slower pace for June while weak global demand and stronger imports led the US to register a wider trade deficit for May. However, ADP employment and initial jobless claims data further endorsed the widely held belief that the US labour market remains a bright spot in the economy. Weak services PMI and trade balance data seemingly outweighed robust employment reports, leading the greenback to trade under pressure against the majors yesterday. The US Dollar is trading in a tight range against the majors this morning amid a lack of decisive news to trigger risk appetite. The focus now squarely shifts to non-farm payrolls data due tomorrow for confirmation of an equally encouraging US labour market outlook, thereby further strengthening beliefs that a partial withdrawal of the Fed’s massive stimulus measures remains on cards. With markets in the US closed today on account of Independence Day, events unfolding in Europe are likely to act as a key trend setter for the US Dollar.

Euro – European Markets

Although markets remained anxious about the political instability in Portugal and weak services PMI in the Euro zone, the single currency nudged above the 1.30 mark against the US Dollar yesterday. This optimism can be partly attributed to the weak US services PMI and trade balance data which strengthened hopes of a continuation of QE3 in the near term. Additionally, the much awaited Euro zone retail sales data surprised market participants on the upside, further validating the recent improvement in confidence indices. Meanwhile, the ECB meeting and the ensuing press conference remain key events in today’s trading session. Although the central bank is expected to keep its powder dry, the ECB Chief’s post meeting press conference will be closely eyed, as Mario Draghi once again finds himself in the hot seat in the midst of political turmoil in Portugal and lacklustre Euro zone performance this month. Additionally, with markets remaining wary of increasing their appetite for riskier assets, as evidenced by rising bond yields in Portugal, it remains to be seen whether Spain is able to clear its long term bond auction hurdle with ease in today’s trading session.

Other Currencies – Highlights

The Japanese Yen has strengthened against the majors in today’s trading session after the Bank of Japan Governor, Haruhiko Kuroda, provided an upbeat view of the Japanese economy. He indicated that the nation is steadily treading the path of recovery and consumer price inflation will gradually turn positive going forward, as effects of the central bank’s massive stimulus measures initiated in April 2013 have begun yielding results. Moreover, political uncertainty in Portugal played its part in increasing appeal of the Japanese Yen against the Euro. With a light domestic economic calendar ahead, markets are expected to keep an eye on the outcome of the ECB meeting and events unfolding in Portugal’s political arena for further cues to risk appetite. For the forthcoming week, the Bank of Japan’s monetary policy meeting as well as economic forecasts will prove crucial in deciding the direction of the Japanese Yen against the majors.