Bernanke Indicates Change of Pace

The US Fed Chief’s indication that it might alter the pace of its asset purchases later this year, if the economy sustains momentum, dampened risk appetite among market participants yesterday. Dismal manufacturing data from China has further played spoilsport for high yield currencies in today’s trading session. However, mostly upbeat manufacturing and services PMI across Europe for June has provided some glimmer of hope to investors. Against this backdrop, markets look forward to the Euro zone consumer confidence and US jobless claims data for further cues. Meanwhile, economic data from the UK continues to paint a brighter picture, as data just out has revealed that monthly retail sales rebounded more than expected for May.

Pound Sterling – UK Markets

“Risk off” sentiment, following hawkish comments by the US Fed Chairman, led the Pound to nudge below the 1.55 mark against the US Dollar in yesterday’s trading session. Further exacerbating the situation, data revealed today that manufacturing activity in China contracted more than forecast for June. However, buoyant retail sales data just released has provided some breathing space for Sterling against the majors. Data indicated that the monthly rise in the UK retail sales surpassed market expectations for May, suggesting that the retail sector is picking up steam despite simmering inflationary pressures. Although the minutes of the last BoE policy meeting showed that majority of MPC members remained less inclined towards further asset purchases, the outgoing Governor Mervyn King, in his last speech before handing over the reins to Mark Carney, called for an introduction of additional stimulus measures, citing weak economic recovery and high unemployment. Meanwhile, public finances data, scheduled for release tomorrow, is expected to shed light over the success of the UK government’s tough austerity measures.

US Dollar – US Markets

Along expected lines, the US Fed kept its monetary policy unchanged in its meeting held yesterday. However, the US Dollar took giant strides forward against the Euro and the Pound after the US Fed revealed that the central bank might shift gears later this year, if the economy continues to sustain momentum and may end the programme by mid 2014. Additionally, a more than expected contraction in Chinese manufacturing activity prompted traders to shun high yield currencies in today’s trading session, as it raised fears over a recovery in the world’s second largest economy. Meanwhile, Fed officials raised their 2014 economic growth forecast for the nation to a range of 3% to 3.5% and expect unemployment to fall to a range of 6.5% to 6.8% by the end of 2014. This upbeat economic assessment partly explains the confidence of Ben Bernanke in tapering QE3 going forward. In this context, markets look forward to a barrage of key economic releases including initial jobless claims, existing home sales and Philadelphia manufacturing data due later today for further insights into the nation’s growth trajectory.

Euro – European Markets

Hawkish comments from Ben Bernanke and lacklustre Chinese manufacturing data have rattled market sentiment, leading the single currency to nudge close to the 1.32 mark against the US Dollar in today’s trading session. Even decent manufacturing data in the Euro zone has failed to limit the downside in the Euro this morning. Data released earlier today indicated that manufacturing and services PMI across most of the major European economies surpassed market expectations for June, hinting that the Euro-area recovery might pick up steam in the coming months. The robust assessment is likely to keep the ECB Chief’s idea of deploying alternative measures to revive the stagnant economy at bay. In today’s trading session, the Euro zone consumer confidence data will be monitored closely for further insights into the performance of the region for this month. Meanwhile, the Spanish long term auction will be keenly watched to ascertain whether the nation is able to clear the bond auction hurdle with ease. Apart from the domestic releases, the Eurogroup finance ministers meeting in Luxembourg later today should grab modest market attention.

Other Currencies – Highlights

The Aussie Dollar registered losses against its US counterpart in yesterday’s trading session after the US Fed Chief indicated that the central bank might start tapering its asset purchases programme later this year. Further aggravating the situation, data revealed that manufacturing activity in China, Australia’s largest trading partner, plunged to a nine month low for June and moved further into the contraction territory on account of weak global demand. The dismal reading has further elevated concerns over the recovery in the world’s second largest economy and increased pressure on the Chinese central bank to loosen its monetary policy in order to revive the faltering economy. Meanwhile, with little in store in terms of domestic macro releases for the week, the Aussie Dollar is likely to monitor overseas events for further direction.