Market Gears toward QE3 Tapering

The robust US non-farm payrolls report on Friday managed to tilt scales in favour of the Fed rolling back its stimulus measures sooner, thereby prompting traders to seek shelter in safe haven currencies. However, the unemployment rate nudged higher and remains at elevated levels compared to the Fed’s target rate. Dismal data from China over the weekend has further aggravated matters for high yield currencies today. However, losses were limited as data showed an uptick in Euro zone investor confidence for June. At home, this week’s labour market and industrial production data will grab market interest for fresh evidence of the UK economy gaining momentum.

Pound Sterling – UK Markets

On Friday, an upbeat US employment report stoked speculation of the Fed scaling back its asset purchases programme sooner than expected, leading the Pound to nudge close to the 1.55 mark against the US Dollar. Moreover, lacklustre Chinese economic data over the weekend has limited Sterling’s upside in today’s session. However, with key UK economic releases during this weekly session expected to provide signs of further improvement, it remains to be seen whether the Pound can regain its lost ground against the greenback. The RICS house price balance data due overnight will be watched closely for hints on the housing sector. Meanwhile, with recent manufacturing PMI releases showing signs of recovery, industrial and manufacturing data scheduled for release tomorrow are expected to shed further light on overall economic performance. The NIESR GDP estimate for May also features in tomorrow’s session and is likely to provide further insights into the nation’s second quarter performance. Going forward, the labour market report due later this week remains a key event in this week’s session and will be keenly gauged to decipher whether the recent uptick in UK economic growth has been reflected in the job market.

US Dollar – US Markets

The US Dollar regained momentum against the Euro and the Pound in Friday’s trading session after the crucial non-farm payrolls report revealed that employment growth in the US surpassed market expectations for May, thereby fuelling speculation that the Fed might begin altering its pace of asset purchases in the near term. The greenback continues to trade on a firmer footing against the majors, as risk appetite among investors decreased after data released over the weekend showed signs of a slowdown in the Chinese economy. With little on the domestic economic calendar today, market attention is likely to turn to retail sales data scheduled for release later this week, to ascertain whether the recent sharp rise in US consumer confidence and an improvement in the job market had any material impact on the nation’s retail sector growth. Apart from this, industrial output and the US monthly budget report due this week will provide further insights into the nation’s growth trajectory. Additionally, the Reuters/Michigan consumer confidence index for June remains a key event in this week’s trading session.

Euro – European Markets

Traders scaled backed their bets on high yield currencies after the upbeat US non-farm payrolls report heightened speculation of a premature withdrawal of QE3, leading the single currency to backtrack against the US Dollar in Friday’s trading session. Moreover, worrying signals from China have led the Euro to briefly nudge below the 1.32 mark against the greenback in today’s trading session. Data just released has revealed that the Euro zone Sentix investor confidence index improved less than expected for June. On the domestic front, data released on Friday revealed that industrial production in Germany unexpectedly rose for April, boosted by a pick-up in construction activity. In today’s trading session, industrial production data from other major European economies, ahead of the Euro zone industrial output report due later this week, will be keenly gauged to ascertain the strength of the region’s manufacturing sector. Apart from the industrial production report, the ECB’s monthly bulletin remains the only key event during this week’s trading session and could prove pivotal for the near term trend in the single currency.

Other Currencies – Highlights

The Australian Dollar weakened against its US counterpart on Friday, as traders flocked to safe haven currencies after a robust US employment report added to speculation that the US Fed might shift gear later this year. Moreover, data released over the weekend revealed that industrial production in China grew at a slower pace, while exports rose just 1% for May, thereby casting doubts over a recovery in the world’s second largest economy. Chinese institutions also extended less than forecast new loans for May, providing further evidence of the economic slowdown weighing on the need of businesses to borrow capital. In the absence of major domestic economic news today, developments taking place in overseas markets will be monitored closely for further direction to market sentiment. On the domestic front, the employment report due later this week will garner most market attention, given the recent weakness seen in the nation’s manufacturing and services sector. Additionally home loans, consumer confidence and consumer price inflation expectations data, due later this week, will be tracked closely for further insights into the pace of economic recovery.