UK Data Still Supports Recovery

The US economy continues to bear the brunt of lawmakers’ intransigence, with the situation threatening to worsen in the near future, as the budget battle in Washington continues without a compromise in sight. As expected, the ECB kept its policy stance unchanged yesterday. At a press conference, Draghi reiterated that the recent recovery was fragile and uneven. Elsewhere, the Italian government escaped unscathed after Silvio Berlusconi pledged support to the government owing to pressure from party members. At home, data just released has shown a marginal drop in services PMI. Though all the three PMI numbers this week were marginally lower than expected, they still are in an expansion phase. Markets await European and US macro data later today for further cues.

Pound Sterling – UK Markets

The Pound traded on a stronger footing against the US Dollar yesterday amid a raft of disappointing news flows from across the Atlantic. While US lawmakers continued to wrangle with the budget spending issue, a private survey showed that the US labour market is struggling to gain momentum. Additionally, a domestic report showed that construction activity in the UK expanded for the fifth consecutive month for September, albeit at a marginally slower pace. In the meantime, the MPC policymaker and noted dove, Paul Fisher, opined that there is no need to add fresh stimulus in the wake of the recent dramatic turnaround in the economy. Meanwhile, data just out has shown a marginal deterioration in Britain’s dominant services sector for September, although its impact on the Pound was barely visible this morning. The Halifax housing report also revealed a less than expected rise in UK home prices for September. This week’s marginally weaker than expected PMI readings have added credence to Mark Carney’s view of not raising interest rates in the near future. With no further domestic macro releases today, investors will eye developments in the US for further direction.

US Dollar – US Markets

The unexpectedly dismal ADP jobs report suggested momentum in the US labour market was falling, dragging the greenback lower against the majors yesterday. Additionally, US lawmakers failed to arrive at a viable solution to the budget standoff yesterday, with neither side willing to compromise, leaving the nation partially shut down for a second successive day. Yesterday’s meeting between Barrack Obama and Congressional leaders aimed at ending the budget deadlock yielded no result. The greenback has continued to trade lower against the Euro in today’s session, as investors continued to weigh the possible consequence of an extended US shutdown and the recent downbeat economic data. This double whammy is likely to deter the Fed from scaling back QE3 later this month, further limiting the upside in the greenback against the majors in the near term. Going forward today, investors have their plate full in terms of macro releases including initial jobless claims and the ISM non-manufacturing PMI report. Additionally, a raft of speeches by Fed officials will be closely scrutinised for further hints on tapering QE3 in the near term.

Euro – European Markets

The common currency strengthened against the US Dollar yesterday after political tensions in the Euro zone’s third largest economy eased following a turnaround by Silvio Berlusconi, primarily due to pressure from senior party members. The coalition government easily won the confidence vote in Parliament, putting an end to days of speculation about the fate of the government. Additionally, Mario Draghi, the ECB president, reiterated that the central bank will consider all measures in its arsenal including additional long-term refinancing operations to battle weak growth and high unemployment. Meanwhile, unlike mixed Euro zone manufacturing PMIs, data just out has shown an increase in service sector activity in the currency bloc, providing support to the Euro against the US Dollar in today’s trading session. Later today, market participants will eye retail sales data in the Euro zone and any positive surprises are expected to further support the common currency against the majors. However, most of the risk sentiment is likely to be impacted by news flows emanating from the US where a prolonged government shutdown cannot be ruled out.

Other Currencies – Highlights

Although the Australian Dollar moved lower against the greenback yesterday following a double shock in the form of dismal trade balance and housing approvals for August, a dismal US ADP employment report and the ongoing budget stalemate in the US helped the Ausie Dollar to recover some of its losses. In today’s trading session, the Australian currency is looking for direction against the greenback this morning despite a remarkable improvement in Australia’s services sector activity. Although services PMI continues to remain in contraction, the significant improvement suggests a gradual recovery in the overall economy. Moreover, robust Chinese non-manufacturing data limited the downside risks in the Australian Dollar against the majors. With no major domestic economic data on tap today, news flows emanating from both sides of the Atlantic will influence risk sentiment among traders. Going ahead, next week’s Australian consumer and business confidence indices and labour market data will be closely followed for further direction.