Whilst recent data continues to suggest further challenges ahead for the UK economy, increasing prospects of the BoE administering policy to counter inflationary pressures, Britain’s economic prospects still appear upbeat, as the CBI raised its growth forecasts citing further improvement in economic activity. With the Euro zone economy still stuttering, the ECB may be hard-pressed to introduce further easing measures to support growth and spur inflation. Although traders do not expect any policy changes by the ECB in this week’s meeting, the prevailing economic environment could prompt the central bank to defy expectations.
Across the Atlantic, a flurry of crucial economic data will shed light on the state of the US economy follwing the partial government shutdown.
Pound Sterling – UK Markets
Disappointing economic data at home together with increased optimism of a US economy recovery dragged the Pound below the 1.60 mark against the US Dollar on Friday. While the UK manufacturing sector continues to expand at a reasonable pace, September’s slightly weaker than expected PMI print dampened investor sentiment, especially in the wake of recent downbeat retail sales and consumer confidence reports. However, the CBI has raised its UK growth forecasts for this and next year, following signs of a pick-up in business investment and trade.
Sterling is trading higher against the greenback in today’s session after data just out has shown an unexpected rise in the nation’s construction PMI for October. Against this backdrop, tomorrow’s all important services PMI print will be closely followed to ascertain the health of the UK economy. Though leading domestic economic indicators are showing signs of exhaustion lately, the BoE is unlikely to alter its policy stance in its meeting later this week. Furthermore, a host of economic data at home and abroad is expected to determine the investor sentiment going forward.
US Dollar – US Markets
The greenback strengthened against its peers on Friday amid signs of a recovery in the US economy. Friday’s ISM manufacturing PMI report for October surprised markets on the upside, thereby indicating that the US manufacturing sector remained largely unaffected by the government shutdown. Additionally, expectations of a ECB interest rate cut aided the US Dollar against the Euro. Meanwhile, comments from several policymakers regarding the tapering of QE afe finding an audience. St. Louis Fed President, James Bullard and Richmond Fed President, Jeffrey Lacker, indicated that recovery in the US labour market in the advent of the monetary stimulus could warrant a cut in the Fed’s $85 billion monthly bond purchases, while the Dallas Fed President, Richard Fisher, indicated that the recent fiscal issues in the US could hamper the recovery.
The US Dollar is trading under pressure against the majors in today’s session ahead of the delayed US factory orders report later today. In the week ahead, the crucial employment report will be closely scrutinised for further insights into the US labour market conditions. Additionally, a raft of speeches by influential Fed policymakers during the course of the week will offer further cues on the likely policy stance in the future.
Euro – European Markets
The Euro continued its downward slide and nudged below the 1.35 mark against the US Dollar on Friday. The recent weakness in the Euro is largely due to increased speculation of the ECB resorting to further easing of its policy stance in the aftermath of disappointing domestic data, particularly the low inflation level for October. Additionally, the weak German macro indicators lately, has taken some shine off the progress made by the peripheral economies. Meanwhile, acknowledging the fruitful efforts made by Spain to overcome its economic troubles, Fitch Ratings has revised the nation’s outlook from negative to stable.
The single currency is trading on a stronger footing against the greenback in today’s trading session as the just out upbeat Euro zone investor sentiment report outweighed the relatively weak Euro zone manufacturing PMI numbers released earlier in the day. Against the backdrop of the deteriorating economic situation in the Euro Zone, the ECB policy meeting this week has assumed significant importance. Furthermore, a slew of domestic economic data throughout the week will determine the movement of the Euro against the majors in the near term.
Other Currencies – Highlights
Despite the domestic inflation gauge climbing at a slower than expected pace for October, the Australian Dollar moved sharply higher against the majors this morning following the release of unexpectedly positive domestic retail sales data. Retail sales in Australia advanced at the fastest pace in seven months for September, lifting the Aussie Dollar against its US counterpart in spite of the Fed tapering speculation amid signs of a US economy recovery. The strengthening in the Aussie Dollar can also be attributed to the upbeat Chinese non-manufacturing data released over the weekend.
With the overnight manufacturing PMI data being the only domestic economic data on tap today, the Australian Dollar will take direction from news flows emanating from both sides of the Atlantic in today’s trading session. Additionally, tomorrow’s RBA policy meeting and the ensuing statement on the central bank’s outlook towards the economy will determine investor sentiment towards the Australian Dollar going forward.