All Eyes On the ECB

Although the US Fed maintained its current monetary stance yesterday, it explicitly indicated that it stands ready to alter the bond purchase programme depending upon prevailing economic conditions. Its European counterpart, the ECB, might not have the leeway to adopt a wait and watch approach today, as current macro environment has shown deterioration in the recent past. Markets expect the central bank to cut its key interest rate by 25 basis points to 0.5%. At home, the feel good factor for Sterling has continued this morning, with construction PMI showing an improvement for April. Tomorrow’s services activity data will provide further hints on the economic performance for the second quarter.

Pound Sterling – UK Markets

Buoyant manufacturing PMI helped the Pound to gain traction and trade close to the 1.56 mark against the US Dollar in yesterday’s trading session. Further providing a helping hand, the US Fed decided to maintain its pace of asset purchases in its meeting held yesterday. The Pound is trading in a tight range against the Euro this morning, as traders remain on the sidelines ahead of the ECB’s monetary policy meeting later today. Manufacturing activity made a buoyant start in the second quarter after data revealed an improvement for April, as upbeat orders from Latin America, the Middle East, North America and Australia helped offset continued lacklustre demand from the Eurozone. With construction PMI data just out also revealing encouraging signs for the UK economy, markets keenly await services PMI data tomorrow to gauge the performance of the economy in the beginning of the second quarter. More upbeat news flows in tomorrow’s session should prove positive for Sterling in the near term. With a light domestic economic calendar today, market sentiment is likely to be influenced by developments taking place in overseas markets.

US Dollar – US Markets

Market speculation that the ECB might cut its key interest rate in its policy meeting later today has led the greenback to trade higher against the Euro this morning. In the keenly awaited FOMC meeting yesterday, the Fed reiterated its pledge to keep key interest rate and the size of asset purchase programme intact at current levels. However, it did indicated that it is ready to alter the pace of bond purchases as economic conditions evolve. Meanwhile, the economic environment in US at the start of the second quarter remains weak. ISM manufacturing activity registered a slower pace of growth for April, in line with the subdued growth in regional manufacturing indices. Moreover, the ADP employment report revealed less than expected private sector job additions for April. Against this backdrop, markets keenly await initial jobless claims data later today ahead of the crucial non-farm payrolls data tomorrow for decoding the growth trajectory. Apart from initial jobless claims data, market participants will keep a tab on the ECB policy meeting due later today for further direction.

Euro – European Markets

The Euro nudged higher and traded above the 1.32 mark for a brief period against the US Dollar yesterday after dismal US economic data spurred speculation of prolonged monetary stimulus in the US. However, the single currency is languishing close to yesterday’s lows this morning ahead of the ECB meeting later today. Following the recent string of dire economic data from the Eurozone., traders are treading cautiously amid growing speculation that the ECB might cut its benchmark interest rate to 0.5%. Additionally, the single currency will take direction from the ECB Chief, Mario Draghi’s post meeting press conference wherein he will air his view on the region’s economic outlook. Though manufacturing PMI data across Europe released earlier today has shown some improvement for April, it still remains in contraction, thereby pointing towards the fragile state of the Eurozone economy. Moreover, with consumer price inflation hovering well below the central bank’s target range, the ECB has adequate room to maneuver its policy, if required.

Other Currencies – Highlights

The Japanese Yen has registered gains against the Pound and the Euro in today’s trading session, as traders shunned high yield currencies amid speculation that the ECB might lower its key interest rate later today. Meanwhile, the Japanese Yen has remained quite volatile against the US Dollar this morning. On the macro front, the minutes of the Bank of Japan’s latest monetary policy meeting have revealed that there was a broad consensus among board members that it was necessary for the central bank to take more aggressive monetary policy measures to end the long bout of deflation. However, the Japanese Yen showed a muted response following the release of the minutes. With little in store in Japan today, market participants are expected to ponder on the ECB monetary policy meeting and the US initial jobless claims data for further direction to currency markets. Going forward, Japan’s trade balance data due next week will be tracked closely to ascertain the impact of the recent weakness in the Japanese Yen.