Bernanke Back in Focus

Although a surprise drop in UK manufacturing production yesterday cast doubt over the recent improving economic landscape, there was some respite for Britain, as the IMF raised its 2013 economic growth forecast for the nation. Risk sentiment remains tempered, as S&P downgraded its sovereign debt rating on Italy by one notch yesterday, suggesting that the situation in the Euro zone remains precarious. Additionally, today’s dismal Chinese trade data has provided further evidence of a slowdown in the world’s second largest economy. The FOMC minutes as well as Ben Bernanke’s comments due later today will provide further food for thought to investors about the timing of a likely withdrawal of QE3.

Pound Sterling – UK Markets

Dismal manufacturing production as well as trade balance data raised concerns over the recent buoyancy witnessed in the UK economy, leading the Pound to nudge below the crucial 1.49 mark against the US Dollar in yesterday’s trading session. Data revealed that the monthly manufacturing production in the UK surprisingly contracted for May to reach its lowest level since January 2012 amid a drop in output of pharmaceuticals and metals while trade deficit widened more than anticipated for May. Although yesterday’s data suggested that the economy is yet not out of the woods, the IMF upwardly revised its economic growth forecast for the nation to 0.9% for this year from 0.6% projected earlier. Moreover, the NEISR estimated that the nation would grow by 0.6% in the second quarter of 2013, faster than the 0.3% rise registered in the previous quarter. However, despite upbeat economic forecasts, Sterling failed to regain its lost ground against the majors yesterday. With most of the major economic releases out for the week, market participants are likely to keep an eye on news flows emanating across the Atlantic for deciphering the near trend of Sterling against the majors.

US Dollar – US Markets

In an otherwise lacklustre day yesterday in terms of domestic macro releases, the US Dollar strengthened against the Euro after S&P downgraded its sovereign credit rating on Italy by one notch. Additionally, the IMF revised down its global growth forecast for 2013 and 2014, thereby increasing the appeal of safe haven assets. In today’s trading session, weak Chinese trade balance data has kept a tight lid on the high yield currencies. Going forward today, the FOMC minutes followed by a speech from the Fed Chief, Ben Bernanke, will exert strong influence on the direction of the greenback against the majors. With the Fed Chairman escalating fears of the central bank tapering its bond buying programme sooner than anticipated, his comments will be dissected further and could prove decisive for risk appetite in today’s trading session. Additionally, it will be worth noting whether or not his fellow FOMC members share the same view.

Euro – European Markets

In the absence of major European economic data, dovish comments from the ECB board member, Jorg Asmussen, dragged the single currency lower versus the US Dollar yesterday. The Euro also pared initial gains versus the Pound in yesterday’s trading session. To add to the woes, the IMF, in its world economic outlook update, lowered its forecast for the Euro zone indicating that the region’s economy will shrink 0.6% in 2013 compared to a 0.4% contraction predicted in April. To make matters worse, S&P downgraded its sovereign credit rating on Italy to “BBB” from “BBB+” and maintained a “Negative” outlook, citing concerns about future growth prospects of the nation. Against this backdrop, it will be interesting to see if the nation can keep its borrowing costs under control during its short term bond auctions due later today. However, all eyes will hover around Ben Bernanke’s speech due in the session ahead. Any further indication of a pre-mature exit from the bond buying programme could weigh on the performance of the single currency in today’s trading session..

Other Currencies – Highlights

The Australian Dollar is trading higher against the US Dollar in today’s trading session. However, further upside for the Aussie Dollar looks limited today in light of the weak trade data from China. Both imports and exports in China unexpectedly fell for June, further validating the widely held belief that the world’s largest economy is showing signs of a slowdown. The domestic data was also not encouraging with the Westpac consumer confidence index showing deterioration for July. This comes on the back of yesterday’s data indicating that business conditions in Australia fell to the lowest level in more than four years. In the wake of a worrying picture of the Australian economy, tomorrow’s employment data will be keenly watched to ascertain whether an interest rate cut by the Reserve Bank of Australia becomes necessary going forward. In today’s trading session, the direction of the Australian Dollar will be undoubtedly determined by news flows emanating from the US, with global investors awaiting information on whether policymakers intend to reduce QE3 before the end of this year.