Political Tussles Continue

On a day when global economic data should be in focus, politicians across the world have hogged the limelight, all for the wrong reasons. While political wrangling led to a partial shutdown in the US, uncertainty prevails in the Italian political arena ahead of today’s confidence vote. Along with the politics, the ADP employment report in the US and the ECB’s policy meeting are the key events that will gain market attention today. On the domestic front, the just released construction PMI data is fairly in sync with yesterday’s unexpected fall in manufacturing PMI numbers, though it continues to show expansion. Against this backdrop, tomorrow’s services PMI report will be keenly eyed by all.

Pound Sterling – UK Markets

The Pound receded from a nine-month high against the US Dollar yesterday, as an upbeat US manufacturing PMI report momentarily shifted the spotlight away from the partial government shutdown, which had lifted Sterling above the 1.62 level against the greenback earlier in the day. Additionally, a marginally weaker than expected manufacturing print at home capped the upside in the Pound against the majors. Despite the slight sluggishness, manufacturing activity in the UK continued to expand for September, providing further indication of the economy recovering from its crisis. Moreover, construction PMI data just released has shown a marginal levelling off of the recent rise. Against this backdrop, tomorrow’s domestic services PMI report will be keenly eyed by traders for further insights into the UK growth story. Meanwhile, in the absence of any domestic economic triggers, markets will closely follow the latest developments in the US budget saga and the ECB’s policy meeting later today.

US Dollar – US Markets

Amid the gloom surrounding the US partial shutdown, the unexpectedly buoyant ISM manufacturing PMI report boosted investors’ morale and aided the greenback in paring some of its earlier losses against both the Pound and the Euro yesterday. However, a failure to agree on a suitable formula at the earliest could slow down US economic growth, as the US Treasury Secretary opined that he was using his last measures to aid the government in stopping its breach of its debt limit. Meanwhile, the US Dollar is looking for direction against the Euro in today’s trading session ahead of the ADP employment report, which is expected to show a steady pace of hiring for September. The ADP report will gain additional market attention, as the official employment report scheduled on Friday is likely to be delayed in the wake of the continued government shutdown. Additionally, speeches by some Fed policymakers, especially the Fed President, Ben Bernanke, will be scrutinised by market participants for views on the current political tussle over raising the budget spending limit and the prospects of tapering QE3.

Euro – European Markets

Although the Euro zone labour market held steady for August, hinting that the Euro zone economy is indeed stabilising following its prolonged recession, the weak German employment and mixed manufacturing numbers played spoilsport for the common currency yesterday. Robust US manufacturing activity also weighed on the performance of the Euro, as markets feared an early withdrawal of QE3. The single currency is trading in a tight range against the US Dollar in today’s trading session ahead of the ECB’s policy meeting and the subsequent press conference by its President, Mario Draghi later today. In the wake of recent mixed economic data, especially Euro zone inflation easing to a three-year low, market speculation is rife that the central bank might resort to further easing measures to support the nascent economic recovery. Moreover, political developments in Italy will be keenly watched, as the coalition government is set to live to fight another day amid reports of a split in Silvio Berlusconi’s centre-right party ahead of today’s confidence vote in parliament. Additionally, the US employment data and further updates on the US budget deadlock will provide further direction to the Euro-US Dollar pair.

Other Currencies – Highlights

The Japanese Yen strengthened against the majors yesterday after the country’s Prime Minister, Shinzo Abe, supported the planned sales tax hike taking effect from April 2014, seemingly aimed at managing the nation’s burgeoning debt. However, he announced additional stimulus measures in order to keep the Japanese recovery cushioned against such a move, without compromising his efforts to end deflation. Additionally, the positive Tankan manufacturing survey kept the Japanese Yen supported against its major peers, despite the unexpectedly weak employment report. In today’s trading session, the Japanese Yen has continued its upward momentum against the majors, as political chaos on both sides of the Atlantic underpinned demand for the Japanese Yen. With no major domestic economic data scheduled for release today, market participants will keenly follow global economic and political events for further direction to risk appetite. Additionally, the Bank of Japan’s policy meeting on Friday will prove crucial for the Japanese Yen against the majors.