ECB Stance Remains Accommodative

While the outcome of yesterday’s BoE policy meeting was in line with expectations, the ECB surprised markets by unexpectedly trimming it’s benchmark policy rate to fight the threat of deflation. Mario Draghi once again reiterated his intention to spur waning inflation and support the region’s economic growth, by taking an accommodative stance as long as necessary. Meanwhile, back in UK, the BoE’s inflation report next week will offer insights into the central bank’s outlook towards the economy. Although, US growth figures surprised on the upside, concerns still prevail as numbers revealed that growth was mainly backed by a build up in inventory. Later today, the non-farm payrolls print will prove crucial to ascertain the near term Fed policy stance.

Pound Sterling – UK Markets

The Pound regained lost ground and ended the day on a stronger footing against the US Dollar yesterday after traders booked profits following the greenback’s rise on the back of upbeat domestic GDP data. Sterling also climbed to a nine-month high against the Euro after the ECB slashed its benchmark interest rates yesterday. Earlier in the day, as expected, the BoE offered no surprises as policymakers voted to keep monetary policy unchanged. With economic recovery gaining momentum over the past few months, investors will closely scrutinise the central bank’s forecasts in its next week quarterly inflation report to assess the prospects of an interest rate hike going forward. Sterling is trading lower against the majors this morning after data just out has shown that the UK trade deficit widened for September. Moving forward, apart from the BoE quarterly inflation report, employment numbers, consumer price inflation and retail sales data will keep investors in the Pound on their toes next week.

US Dollar – US Markets

A buoyant US third quarter GDP report easily beat analysts’ forecasts and propelled the greenback against its counterparts yesterday. The upbeat growth print overshadowed the marginally lower than expected fall in the US jobless claims numbers. However, the sharp rise in GDP numbers was largely due to a build up in inventories, even as consumer spending dwindled, pointing towards a weak phase of economic growth in the final quarter of 2013. The US Dollar was also aided by the ECB decision to further ease its policy rates in its meeting yesterday. Meanwhile, the US Dollar is trading range bound against the majors in today’s session as traders await the release of the delayed US labour market report later today. With the October figures likely to be skewed due to the government shutdown, investors will take the employment numbers with a pinch of salt. Furthermore, investors will keenly follow the Reuters/Michigan consumer sentiment index and personal spending reports to assess the impact of the government shutdown and the fiscal impasse on consumer confidence. With a light domestic economic calendar next week, the US industrial output will be tracked by traders for further direction.

Euro – European Markets

In the wake of the dovish stance adopted by the ECB in slashing its benchmark policy rate to combat the falling inflation, the common currency weakened sharply against the majors yesterday. In the aftermath of the recent slump in inflation, fears of deflation and the Euro zone slipping back into recession have gained grounds. Mario Draghi, the ECB President, opined that the Euro zone may endure a prolonged period of low inflation levels, while also stating that accommodative monetary policy will remain in place for as long as necessary. Additionally, German industrial output dropped for September, indicating that growth in the region’s largest economy may have cooled in the third quarter. The Euro has little changed against the majors this morning, despite the S&P downgrading France’s credit rating to “AA” from “AA+”, citing high unemployment and weak economic growth prospects, earlier today. Additionally, the upbeat German trade balance data was greeted with a muted response. A raft of significant US economic data will drive trading sentiment in the Euro-US Dollar pair today.

Other Currencies – Highlights

The Canadian Dollar weakened against the US Dollar yesterday following the release of upbeat third quarter GDP data by its southern neighbour. The better than expected US growth numbers fuelled speculation of an interest rate hike by the Fed in its policy meeting next month, thereby underpinning demand for the greenback and weighing on high yield currencies. Meanwhile, the Canadian Dollar has continued to move lower against the US Dollar ahead of today’s domestic employment report which is expected to show an improvement. However, with the Canadian economy closely related to its US counterpart, investors in the Canadian Dollar will keep a close tab on the all-important US non-farm payrolls report, among other later today. Looking forward to the next week, significant domestic and international news flows will prove crucial for the Canadian Dollar against the majors.