Markets Pause for Breath

Encouraging German Ifo sentiment indices and yesterday’s U.S. jobless claims data supported market sentiment yesterday. With the U.S. final Reuters/Michigan consumer confidence index being the only major economic release today, market focus has shifted to a barrage of key macro releases across the Atlantic due next week to ascertain the pace of recovery. At home, the economy looks to be heading towards a sustained phase of growth after yesterday’s GDP data came in line with estimates. With little on the domestic macro calendar today, the BoE policy meeting and PMI releases due next week will be in focus.

Pound Sterling – UK Markets

Despite GDP data released yesterday meeting wider market estimates, the Pound nudged lower against the US Dollar as it failed to meet market expectations that the figures might surpass estimates. However, the currency clawed back much of its losses against the US Dollar in the later part of the session after mixed US macro data released yesterday reassured investors that the US Fed might continue with its easy monetary policy for a longer period than expected. The GDP data released yesterday has provided some breathing space for the UK Chancellor, as he opined that the economy was on the “mend” and that the government will continue with its multi-year austerity prescription. With the nation still facing significant headwinds in terms of austerity, high inflation outlook and a weak Euro zone recovery, all eyes will remain focused on manufacturing and construction PMI releases for July due next week to ascertain whether the recovery is sustainable. The next week’s BoE meeting also remains a key event on traders’ radar.

US Dollar – US Markets

An improving economic landscape in the Euro zone coupled with mixed US macro data led the US Dollar to trade on a weaker footing against the single currency in yesterday’s trading session. Data revealed that orders for durable goods surpassed market expectations for June, bolstered by robust aircraft demand while manufacturing activity in the Kansas region unexpectedly moved into positive territory for July. However, jobless claims rose more than anticipated last week, suggesting that the recovery in the labour market is not stable yet. Although this week’s mixed macro data supported the case for continuation of the central bank’s easy monetary policy, markets keenly await the second quarter GDP, ISM manufacturing and non-farm payrolls report due next week for a clearer picture of the economy. Additionally, the FOMC meeting scheduled next week will be closely watched. In today’s trading session, the greenback is trading in a tight range against the Pound and the Euro, as a lack of decisive news prompted traders to adopt a cautious approach. Markets look forward to today’s Reuters/Michigan consumer confidence data which is expected to reveal a marginal upward revision for July.

Euro – European Markets

The single currency strengthened against the US Dollar in yesterday’s session as upbeat German Ifo sentiment indices and mixed US economic data prompted traders to increase their bets in high yield currencies. Additionally, a tepid response to the UK GDP numbers led Euro to move higher against Sterling yesterday. Despite robust PMI data across Europe and the German Ifo sentiment data renewing hopes of a revival, the IMF portrayed a grim picture of the Euro zone economy. In the midst of ongoing debt woes, simmering political crisis and record high unemployment rate, the agency indicated that growth in the region remains elusive with high risk of falling into prolonged stagnation, if the US Fed scales back its massive stimulus measures. The agency further pressed the ECB Chief to undertake bold policy measures in order to reignite the economy. Against this backdrop, unemployment rate and the ECB policy meeting due next week are expected to grab market focus. On account of a light European economic calendar today, markets are likely to pay modest attention to the US economic data due later today for further cues to risk appetite.

Other Currencies – Highlights

The Japanese Prime Minister, Shinzo Abe, received a morale boost this morning after data released earlier today revealed that consumer prices in Japan climbed more than anticipated for June, with core prices rising the most in four and a half years. Today’s data has provided strong evidence that the Prime Minister’s and his hand-picked Bank of Japan’s Governor, Haruhiko Kuroda’s unprecedented monetary policy measures are yielding results, leading the Japanese Yen to strengthen against the US Dollar and the Euro in today’s trading session. However, the marginal rise still presents a strong case for the central bank to continue with its massive stimulus measures to achieve 2% inflation target. In the forthcoming week, a flurry of key economic releases in Japan including jobless rate, manufacturing PMI, retail sales and industrial production are expected to provide further insights into the strength of the nation’s recovery.