No US Deal in Sight

Although eyebrows have been raised due to sluggish PMI prints during this week, the UK economy looks on course to build on its recovery during the latter half of this year. The BoE in its meeting next week is also expected to exude similar confidence in the economy by keeping its policy stance unchanged. Across the Atlantic, traders fear that the budget standoff might continue longer and could potentially hamper efforts to solve a greater challenge of raising the debt limit ceiling. The much awaited non-farm payrolls report scheduled for today has been delayed, as we enter the fourth day of deadlock in Washington.

Pound Sterling – UK Markets

The upward momentum in the Pound was arrested against the majors yesterday, as traders booked profits following weaker than expected domestic services sector and housing data. Although this week’s PMI data surprised market participants marginally on the downside, the fact that all three indices showed an expansion in activity bodes well for the UK economy. However, the downside in Sterling was limited amid weak US macro data and uncertainty surrounding the budget stalemate, further reducing the possibility of QE3 tapering later this month. In today’s trading session, the Pound is trading lower against both the US Dollar and the Euro. Meanwhile, the just out Lloyds employment confidence data has shown further improvement in the UK labour market outlook. Against the backdrop of largely positive economic data lately, the BoE is expected to keep its current policy stance unchanged in its meeting next week. Apart from the BoE meeting, some key economic indicators including the factory output report and the NIESR GDP estimate will hold importance for Sterling’s movement against the majors in the near term.

US Dollar – US Markets

The US Dollar nudged lower against the Euro yesterday, as weak services data in the world’s largest economy further dampened investor confidence in the greenback. Additionally, initial jobless claims rose for the last week, though it came in marginally better than expected. With a budget deal still elusive and a deadline approaching on raising the debt ceiling, the US President has appealed to the House Speaker, John Boehner, to call for an unconditional vote on a stopgap spending bill. The Fed policymakers also cautioned that a protracted government shutdown will affect economic growth in the fourth quarter and make the central bank’s task to wind down its QE3 programme in October “more ambiguous”. In the absence of any domestic economic releases, especially the non-farm payrolls report, owing to the government shutdown the greenback is searching for direction against the majors this morning ahead of another round of speeches by Fed policymakers later today. However, developments taking place in Washington will be keenly eyed and any negative news flows could further weigh on the performance of the greenback against the majors.

Euro – European Markets

The Euro zone’s nascent recovery looks set to gain traction, as indicated by yesterday’s upbeat retail sales report which lifted the common currency above the 1.36 mark against the US Dollar. While retail sales rose more than expected for August, services sector activity in the currency bloc rose to a 27-month high for September. Additionally, the single currency remained supported following weaker than expected US non-manufacturing data and the continued standoff over US budget talks. Meanwhile, the Euro is trading in a tight range against the US Dollar this morning amid a lack of domestic economic triggers. With a delay in today’s US economic releases, sentiment in currency markets is expected to be governed by further updates on the US budget deadlock and speeches by a few Fed officials. For the forthcoming week, the ECB monthly report along with a raft of consumer price inflation numbers in key Euro zone economies will be closely watched for further insights into the region’s economy.

Other Currencies – Highlights

The Japanese Yen is trading firmer against the US Dollar in today’s trading session, as traders remained largely reluctant in taking fresh positions in the greenback amid US budget woes and weak economic data. Furthermore, the Bank of Japan maintained its current monetary policy and stated that the economy will continue to recover at a moderate pace. However, the central bank warned of downside risks to the Japanese economy arising out of the European debt crisis and the pace of US economic recovery. In the wake of a light global economic calendar today, investors are looking ahead to next week’s minutes of the Bank of Japan’s September policy meeting for further direction to risk appetite. Also, news flows emanating from both sides of the Atlantic, especially the US, will impact the Japanese Yen’s movement against the majors next week.