Osborne Sticks to Austerity

The single currency gained some respite this morning after the European Union finance ministers emerged with a blue print to avert future bank failures by shifting the burden from taxpayers to bank owners. Moreover, a robust German employment report has helped the single currency to nudge higher. Today’s Euro zone confidence indices are expected to provide further direction. Meanwhile, yesterday’s downside revision to US first quarter economic growth has cast doubts over Bernanke’s latest verdict of withdrawing QE3 in the near term. At home, George Osborne gave prescribed another bitter pill to the economy yesterday by unveiling a new set of austerity measures, thereby limiting the upside for Sterling. Additionally, the annual first quarter GDP numbers have been lowered sharply this morning.

Pound Sterling – UK Markets

The Pound nudged closer to the 1.53 mark against the greenback yesterday after the UK Chancellor, George Osborne, renewed his commitment to austerity by unveiling another round of spending cuts that would begin in April 2015, with plans to raise £11.5 billion in savings from government budgets. Moreover, the BoE’s financial stability report offered a bleak picture of the nation’s financial system citing global economic uncertainty. To add to these woes, BoE policymaker, David Miles, indicated that the British economy remained weak and renewed his call for more QE. In today’s trading session, the Euro finance ministers’ agreement to avert future bank failures and a robust German employment report has capped the upside for Sterling against the Euro. On the domestic front, although final GDP data just out has confirmed that the UK economy managed to escape a triple dip recession for the first quarter, annual growth has seen a sharp downward revision, leading the Pound to move lower. Markets will now focus on the GfK consumer confidence survey in the UK due early morning tomorrow for further insights into the retail sector.

US Dollar – US Markets

The Euro finance ministers’ deal to save insolvent banks and buoyant German employment data has kept a tight lid on the greenback in today’s trading session. Meanwhile, yesterday’s revised first quarter GDP data has given a distinct list to the recent buoyancy witnessed in the US economy. Data released yesterday revealed that the US economy expanded at an annualised pace of 1.8% for the first quarter compared to a 2.4% growth estimated earlier, primarily impacted by a sharp downward revision to the consumer spending growth rate. Yesterday’s weak economic data has once again reinstated market belief that fiscal follies continue to affect consumer spending and could weigh on the economic growth going forward. Considering weak economic growth, the Fed Richmond Chief indicated that the central bank is not close to reducing its bond purchase programme. In this context, comments from a few other Fed officials later today will grab market focus. Additionally, markets are also expected to keep a tab on initial jobless claims, pending home sales and Kansas manufacturing data scheduled for release later today for further insights into the economic recovery.

Euro – European Markets

The common currency has managed to gain traction in today’s trading session following a bank rescue deal by the EU finance ministers. In a move to quell public anger over massive bailouts, the Euro-area finance ministers agreed to shift the burden for bailing out future bank failures from taxpayers to the financial sector owners namely bank owners, creditors and large investors. Moreover, data out today has revealed that number of unemployed people in Germany unexpectedly declined for June, validating a rise in confidence indices released recently. The buoyant employment report has further strengthened belief that the Euro region’s largest economy is treading the path to recovery. Against this backdrop, retail sales data in Germany due tomorrow will be gauged for further updates on this front. Meanwhile, the single currency had lost ground against the greenback yesterday after the ECB Chief, Mario Draghi, reiterated his commitment for an accommodative policy stance while pressing national governments to introduce more reforms in a bid to reignite the stagnant economy. Going forward today, a flurry of Euro zone confidence indices will be tracked for further cues to risk appetite.

Other Currencies – Highlights

The Kiwi Dollar is trading a firmer footing against its US counterpart today mirroring “risk on” sentiment prevalent in currency markets. Domestic data out today has provided a mixed picture about the health of the nation’s economy. The trade balance report released overnight revealed that trade surplus in New Zealand unexpectedly narrowed for May, undermined by a sharp fall in meat exports, the nation’s second largest export product. However, confidence among businesses improved substantially and reached the highest level since June 2010, primarily bolstered by a pickup in construction activity. In this context, building permits data due later today will be closely tracked for further insights. Additionally, economic releases from the US and the Euro zone are likely to hold prominence for the Kiwi Dollar’s demand against the majors in today’s trading session. Moreover, with no major economic releases featuring on the domestic economic calendar next week, trading sentiment in the Kiwi Dollar is likely to be governed by news flows emanating from global markets.