Green Shoots After a Late Spring

Market speculation that the US Fed will roll back its stimulus measures received further support yesterday after data revealed that consumer morale in the US surged to a five year high for May, prompting traders to seek shelter in safe haven currencies. Despite showing signs of revival recently, the German economy disappointed after it registered a higher than rise in the unemployment number for May. With major Euro zone economies reporting sluggish growth, the European Commission’s report on deficit reduction policies and the OECD’s economic growth forecast for the region due later today will grab market focus. At home, the CBI reported sales will be closely scrutinised for insights into the UK’s retail sector.

Pound Sterling – UK Markets

In the absence of major domestic news, external cues played a pivotal role in determining the trend in Sterling in yesterday’s trading session. The Pound lost ground and nudged below the 1.51 mark against the US Dollar yesterday, as buoyant US macro data reminded traders that the US Fed’s massive stimulus measures could be wound up soon. Meanwhile, a downbeat German employment report should limit the downside risks for Sterling against the single currency in today’s trading session. With recent economic reports continuing to project that the UK economy is on the mend, official retail figures for the previous two months have suggested otherwise. In this context, markets are expected to keep a tab on CBI reported sales data due later today to decipher the strength of the retail sector. With another light UK calendar today, developments taking place in overseas markets will be eyed for further direction to currency markets. Meanwhile, GfK consumer confidence, Nationwide house prices and the Lloyds business barometer are expected to hog the limelight in tomorrow’s session.

US Dollar – US Markets

Buoyant US economic data increased the appeal of the greenback against the majors in yesterday’s trading session. Traders scaled back their positions in high yield assets, as data further strengthened the belief that the US Fed might shift gears sooner this year in the wake of upbeat economic reports. In line with the Reuters/Michigan report, data indicated that consumer morale in the US surged to its highest level in five years for May. It remains to be seen whether the improving confidence helps the economy register robust growth for the second quarter. Additionally, data indicated that both, Dallas and Richmond, showed a marked improvement in their manufacturing activities for May, adding to signs that manufacturing activity, which was a major drag on the nation’s performance, is picking up. Moreover, the S&P Case-Shiller home price index climbed more than expected for March. Moody's also reacted to the recent buoyancy seen in the economy by changing its outlook on the US banking system to “Stable” from “Negative”. With little on the domestic economic calendar today markets await a raft of US macro releases tomorrow, especially the revised first quarter GDP figures.

Euro – European Markets

The Euro nudged below the 1.29 mark against the US Dollar in yesterday’s trading session, as upbeat US macro data prompted traders to shun high yield currencies. Moreover, the single currency has failed to attract demand in today’s session, as data out earlier today revealed that the number of unemployed people in Germany edged up for May, reigniting worries that the Euro region’s largest economy has again hit a rocky patch despite recent encouraging signs. With Euro zone economies registering sluggish growth amid tough austerity measures, the European Commission, in its country specific recommendations later today, is expected to call member states to go easy on fiscal consolidation plans in order to make their economies more competitive and improve labour market conditions. The OECD economic growth forecast is also expected to grab market focus in today’s trading session and could prove decisive for the direction of the common currency against the majors. Apart from expected forecasts, the German consumer inflation data due later today also remains a key event on traders’ radar and will provide insights into the region’s inflationary trend ahead of the Euro zone inflation data on Friday.

Other Currencies – Highlights

Robust macro numbers from the US disrupted the Australian Dollar against the greenback in yesterday’s trading session. The Aussie Dollar has continued its downtrend this morning amid “risk off” sentiment among market participants. Moreover, the IMF lowered its 2013 economic growth forecast on China. On the domestic front, the Housing Industry Association reported that new home sales in Australia rose for the second straight month for April, thereby signalling that low interest rates on home loans has put the market into a state of recovery. However, it remains to be seen whether the housing market can fill the gap left by a slowdown in the nation’s mining sector. In today’s trading session, external cues are likely to hold prominence for determining the trend in the Aussie Dollar against the majors. Meanwhile, building approvals and private sector credit data due later this week will garner market focus for further cues.