Bernanke Keeps Market Guessing

Fears of premature withdrawal of QE3 in the US roiled market sentiment yesterday, prompting traders to scale back their bets on high yield currencies. The Fed Chief, in his testimony before Congress, suggested that tapering of bond purchases is around the corner, with the Fed minutes also striking a more hawkish tone. Against this backdrop, a barrage of US economic releases today and the next few weeks will be watched closely for hints on future policy moves. At home, the revised GDP data for the first quarter just released has matched earlier estimates and are in line with market consensus. Across Europe, manufacturing PMIs in key European economies surprised on the upside, providing some respite for investors.

Pound Sterling – UK Markets

Despite a fall in UK public sector borrowing, Sterling witnessed pressure against the US Dollar yesterday and nudged below the 1.51 mark, as comments from the US Fed Chief and the FOMC minutes suggested that tapering of the QE programme is nearer. To make matters worse, a dismal retail sales report poured cold water over the recent buoyancy witnessed in the UK economy, as cold weather and higher prices snapped demand for retail items. Moreover, the CBI data indicated a less than expected improvement in factory orders for May. Meanwhile, the revised GDP data just out has confirmed that the UK managed to escape contraction for the first quarter of 2013, expanding 0.3% sequentially and in line with earlier estimates. This should limit downside risks for the Pound against the majors in today’s trading session. Yesterday’s minutes also revealed that the majority of policymakers voted for keeping the size of asset purchases unchanged, amid signs of economic improvement and the danger of stoking inflation expectations. With little on the UK economic calendar today, markets are expected to keep an eye on overseas events for further direction to currency markets.

US Dollar – US Markets

The US Dollar moved higher against its major peers in yesterday’s trading session, as market sentiment was rattled after Ben Bernanke opined that the central bank might begin scaling back its ultra loose policy stance in the next few meetings, if the domestic economy continues to sustain momentum. Risk appetite received a further blow after the Fed minutes revealed that some members suggested that the central bank should start tapering its asset purchases as early as next month. With fears of a premature withdrawal of stimulus remaining on the cards, the greenback has remained close to yesterday’s lows against the majors this morning. An unexpected contraction in Chinese manufacturing activity further eroded the appeal of high yield currencies. With the Fed’s monetary policy inevitably tied to the nation’s growth, a raft of key economic releases will prove decisive for the greenback in today’s session. With yesterday’s existing home sales registering an improvement for April, the house price index and new home sales data due today will be monitored closely for further insights into the housing recovery. Additionally, today’s jobless claims figures will garner increased focus, given a reminder from the Fed yesterday about the importance of the labour market in its future policy moves.

Euro – European Markets

A hawkish tone from the Fed Chief and the FOMC minutes suggested that the central bank might slow down its asset purchases in the near term, leading the Euro to trade below the 1.29 mark against the US Dollar in yesterday’s trading session. However, the single currency has recouped some of its losses this morning after data released earlier today revealed an improvement in manufacturing and services PMI in Germany, France and the Euro zone for May. The figures have provided a glimmer of hope that the Euro zone economy is gaining lost ground following deterioration witnessed in the last two months. With the European economy showing some signs of improvement, the Euro zone consumer confidence data scheduled later today will attract market attention and is expected to show similar buoyancy for May. Apart from confidence data, Spanish bond auctions and a plethora of key economic releases from the US later today will have a bearing on risk appetite in today’s trading session. Meanwhile, the German Gfk and Ifo confidence indices due tomorrow will be gauged for early insights into the nation’s second quarter performance.

Other Currencies – Highlights

The Australian Dollar backtracked against the greenback in yesterday’s trading session, as “risk off” sentiment prevailed in markets, after the Fed Chief and the FOMC minutes hinted that the central bank might scale back its massive stimulus programme sooner than anticipated. Further exacerbating matters, data released earlier today revealed that manufacturing activity in China, Australia’s important trading partner, unexpectedly swung into contraction territory for May, for the first time in seven months. This has added to the belief that economic growth in the world’s second largest economy is losing its sheen for the second quarter of 2013. On the domestic front, data released earlier today indicated that consumer price inflation expectations rose marginally for May, still within the RBA’s target range, thereby providing ample space to the central bank to resort to further easing, if required. With little in store in terms of domestic macro news today, the trend in the Australian Dollar will depend upon risk appetite among market participants, given a flurry of key economic releases from the US due later today.