US Stalemate Continues

With the US government shuttered for the second week, all eyes are fixated on behind the scenes action in Washington for further direction to currency markets. Although no breakthrough appears in sight, there was a glimmer of hope as Barack Obama expressed his willingness to accept a short term increase in the country's borrowing limit. Contrastingly, the gloom in Europe appears to be fading, as Greek officials expect the nation to emerge from its prolonged recession next year. In the aftermath of downbeat PMI data in the UK, the overnight retail sales report from the BRC has reflected signs of weakness in the British economy, thereby casting doubt over the strength of the recent recovery.

Pound Sterling – UK Markets

Sterling remained a beneficiary of downbeat investor confidence data in the Eurozone versus the Euro yesterday, while resuming its good run versus the US Dollar amid continued political stalemate in the US. In overnight macro releases, the BRC reported that like-for-like sales in the UK grew at a slower-than-expected pace for September, as warm weather weighed on the demand for autumn clothing. This has limited the upside in the Pound against the majors this morning. Despite the recent spate of tepid economic data from the UK, there is growing belief that the economy is gathering momentum, as the BCC indicated that factories in Britain are in the midst of a “growth spurt”, thereby hinting at a possible upgrade of the GDP forecast in the near term. Meanwhile, the housing sector continues to perform well, as the RICS house price balance rose to its highest level since mid-2002. With a lacklustre day ahead in terms of domestic macro news, markets will set their eyes on tomorrow’s industrial production and trade balance data, which are likely to show an improvement for August. Meanwhile, news flows emanating from the US concerning the ongoing budget impasse is expected to steer market sentiment today.

US Dollar – US Markets

The US Dollar traded in a tight range against the Euro yesterday, as traders await clarity over the future course of action from US policymakers in order to deal with the debt impasse. However, a softening in stance was visible from the US President, Barack Obama, as he expressed his willingness for a short term increase in the nation's borrowing authority in order to avoid a default. Additionally, reports emerged that influential policymakers are building alternatives to avert an immediate catastrophe. Traders are likely to keep a close watch on events unfolding in Washington, given its implications to the greenback. Speeches from a few Fed policymakers and some US economic data later today will arouse market interest. With the IMF highlighting the spill over effects of the Fed tapering its stimulus programme, minutes of the US Fed’s latest monetary policy meeting tomorrow will be keenly eyed for any hints on the same. The IMF’s World Economic Outlook report later today is likely to offer further insights into the future course of the US economy.

Euro – European Markets

Yesterday, the Euro moved lower versus the Pound, as the forward looking Sentix investor confidence in the Euro-area slipped unexpectedly for October, dampening optimism over the outlook for the region’s economy. Additionally, investors avoided taking further bets in the wake of looming political woes in the world’s largest economy. However, there was some encouraging news from a peripheral zone, as Greece's government expects its economy to grow in 2014 after witnessing six years of recession. In today’s trading session, the Euro is searching for direction against its major counterparts despite the release of upbeat trade balance data in Germany, which showed a wider than expected trade surplus for August. Market participants expect similar buoyancy in German factory orders data later in the day, which could prove crucial for the single currency. Additionally, developments taking place across the Atlantic will have a bearing on the common currency ahead of tomorrow’s minutes of the US Fed’s last monetary policy meeting.

Other Currencies – Highlights

The Japanese Yen retreated against most of its major peers this morning and receded from an eight-week high against the US Dollar following dismal economic data. The nation’s current account surplus contracted to a record low for August due to a drop in overseas income and as imports exceeded exports. Another report showed that Japan’s trade deficit narrowed less than expected for the same period. However, an eco watchers’ survey out earlier today has provided an upbeat assessment of the Japanese economy. A flurry of domestic releases in the week ahead, along with minutes of the Bank of Japan’s latest monetary meeting, will be tapped by investors to get a clearer view on the Japanese economy. Additionally, developments taking place in the US political arena will prove crucial for risk sentiment.