Fed Policy in Focus

Comments from US Fed policymakers continue to signal that a partial withdrawal of the current monetary stimulus remains in the offing, dragging high yield currencies lower. However, easing US consumer price inflation and dismal macroeconomic data, released yesterday, have fuelled belief that a hasty withdrawal might prove counter productive. With little on the economic calendar in the UK and Europe today, consumer sentiment data in the US later will grab market attention, to see if it offers some solace to investors in an otherwise disappointing week. For further direction, next week will prove crucial, as we have a barrage of key economic releases in the UK, Europe and the US.

Pound Sterling – UK Markets

The Pound registered losses against the US Dollar this morning after a string of dire US economic data and downbeat comments by a Fed official lowered investors’ appetite for riskier currencies. However, Sterling is trading in a tight range against the single currency due to a lack of triggers in both the UK and Europe. With another day of a light domestic economic calendar, market attention will be on the speech by MPC member Martin Weale later today. Meanwhile, a raft of key economic releases from the UK due next week will be keenly eyed for further insights into the pace of the nation’s recovery. The BBA mortgage loans and Rightmove house prices data due next week will shed light over the state of the housing sector. However, much of market attention will be focused on the BoE minutes due next week. Given the upbeat PMI releases for April and buoyant first quarter GDP results, it will be interesting to see whether there is a shift in stance for reducing the BoE asset purchase target. Retail sales and the second estimate of UK GDP and consumer price inflation data also feature on next week’s calendar and are expected to influence the direction of the Pound in the near term.

US Dollar – US Markets

Prospects of an early withdrawal of the current monetary stimulus continued to garner support, as a Fed official, John Williams, indicated that the central bank might begin tapering its asset purchases in the next few months. However, yesterday’s economic data in the US portrayed a dismal scenario across sectors. The jobless claims figure remained volatile, as data showed that jobless aid seekers rose sharply last week from its multi-year lows. Housing starts and the Philadelphia Fed manufacturing activity data also surprised market participants on the downside. Meanwhile, data indicating an easing trend in consumer price inflation continued to highlight that the current policy stance had minimal influence on prices. Taking these events into account, the minutes of the FOMC meeting and the Fed Chief Ben Bernanke’s testimony due next week will be subject to close scrutiny, for further clarity on the central bank’s policy stance going forward. With most US economic data released during this week disappointing investors, markets expect some respite from the Reuters/Michigan consumer sentiment data due later today, which is likely to show an improvement for May.

Euro – European Markets

Although the Euro managed to nudge higher following a buoyant trade balance report yesterday, the single currency lost ground against the US Dollar after a dismal set of economic indicators from the US and hawkish comments from a Fed official prompted traders to scale back their bets on riskier currencies. In line with the upbeat German trade balance data, the Euro zone trade surplus rose for March to its highest level since the formation of the bloc. Another report showed that the final consumer price inflation reading remained unchanged for April, providing leeway to the ECB to resort to further easing measures, if required. With little in store in terms of macro news today, the common currency is expected to take direction from overseas markets for further cues to risk appetite. A slew of manufacturing and services PMI across Europe due next week will be keenly eyed to ascertain whether the downtrend in the region’s economy has bottomed out. Any negative surprises are likely to further strengthen the case for additional easing by the ECB going forward.

Other Currencies – Highlights

The Canadian Dollar has continued to trade under pressure against the US Dollar this morning following a string of disappointing US macro data and hawkish comments from the President of the San Francisco Fed. On the domestic front, markets are expected to keep a tab on consumer price index data due later today, which is expected to show that inflationary pressures eased for April. With recent macro data posting lacklustre numbers and with easing inflation, monetary policy could probably remain accommodative. Apart from consumer price inflation data, markets are expected to monitor overseas events for further direction to currency markets. For next week, the only feature on the domestic economic calendar is retail sales for March. The Canadian Dollar is thus likely to be governed by events unfolding elsewhere.