Caution Prevails in Markets

Investors continued to tread cautiously amid looming uncertainty over the stance that the US Fed Chairman might adopt in his post meeting press conference due tomorrow. Meanwhile, the beleaguered Euro zone economy continues to show encouraging signs, as data showed an improvement in German consumer confidence for August and Spain’s economy contracted at a slower pace in the second quarter. In today’s session, a raft of leading indices in the Euro zone are expected to provide further insights to risk appetite. At home, the CBI report released yesterday provided initial evidence that the UK nation is poised to register strong performance for the third quarter.

Pound Sterling – UK Markets

Yesterday’s dismal mortgage approvals and consumer credit data highlighted the lingering weakness in the UK’s financial system and indicated that downside risks still persist despite the recent set of upbeat economic data. This led Sterling to trade on a weaker footing against the US Dollar and the Euro in yesterday’s trading session. However, despite simmering inflationary woes, the CBI report released yesterday indicated that retail sales in the UK surpassed market consensus for July and rose at its fastest pace since January 2013, bolstered by warm weather and heavy discounts, supporting the UK Chancellor’s recent claim that Britain is now on the mend. In today’s trading session, the Pound is trading in a tight range against the majors, as market participants seem to have adopted a cautious stance ahead of the outcome of major central bank meetings this week. On account of a light day ahead, news flows emanating from Europe and the US are expected to determine the near term trend for the Pound. Meanwhile, with the CBI retail sales data surprising on the upside, the Gfk confidence report due overnight is expected to gain increased market attention for gauging consumer morale in the nation.

US Dollar – US Markets

The US Dollar moved higher against the Pound and the Euro yesterday ahead of the two day FOMC meeting beginning later today. The Fed Chairman, Ben Bernanke, in his recent Congressional testimony, had stated that the pace of bond buying can be varied depending on the economic outlook. The recent demand for the greenback is largely attributed to general risk aversion prevailing on account of mixed US economic data released lately and on increased speculation that the Fed will leave its pace of bond purchases programme intact. Though yesterday’s pending home sales data came in better than expected, it showed a monthly decline for June, further adding to the indecisiveness in the housing market. Moreover, data released yesterday showed that manufacturing activity in the Dallas region unexpectedly slowed for July. Meanwhile, in today’s trading session, market participants are expected to keep a tab on the consumer confidence report and the S&P/Case-Shiller house price index in the US for further direction. However, most of the market attention is on tomorrow’s second quarter GDP data and the FOMC meeting which could prove pretty volatile for the greenback.

Euro – European Markets

The single currency is trading in a tight range against the US Dollar in today’s trading session. Data released today revealed that consumer confidence in Germany improved for August. Further providing a helping hand, data showed that the Spanish economy contracted 0.1% for the second quarter, slower than 0.5% contraction witnessed in the previous quarter and in line with the Bank of Spain’s estimates released yesterday. Signs of green shoots as suggested by the recent economic releases have provided evidence that the region might see a turnaround in the coming months. Against this backdrop, the German and the Euro zone unemployment data due tomorrow will be tracked closely to ascertain whether improved confidence and economic fundamentals had any material impact on the region’s simmering unemployment. In today’s trading session, apart from a slew of the Euro zone confidence indices, investors are expected to keep a tab on the German consumer price inflation data due later today. With inflation inevitably influencing the ECB’s future policy moves, today’s data ahead of the Euro zone inflation data due tomorrow is expected to provide early insights into the region’s inflation outlook for July.

Other Currencies – Highlights

The RBA Governor, Glenn Stevens, opined that second quarter inflation data suggests that the central bank still has room to lower interest rates further, if required to support the economy. The Australian Dollar, which was already on the back foot from a surprisingly weak report on building approvals published earlier today, came further under pressure as dovish comments from the RBA Chief eroded the Aussie Dollar’s appeal against the majors in today’s trading session. This week’s Australian private sector credit as well as manufacturing PMI data ahead of the RBA’s monetary policy meeting due next week will be keenly watched to gauge prospects of the central bank altering its policy stance in the near future. Although domestic data holds relevance, much of the market attention will revolve around developments taking place across the globe over the next three trading session, especially the US, for determining the near term trend in the Aussie Dollar against the majors.