UK Flatters to Deceive

After a long streak of positive data, the UK reported some disappointing figures this morning, in sync with last week’s downbeat PMI numbers whilst yesterday in sharp contrast the IMF sharply raised its outlook on the domestic economy for 2013 and 2014. On the international front, the US debt ceiling conundrum continues to drag on, as Republicans appear reluctant to give an inch despite the seemingly softened stance of Barack Obama. In the midst of the persistent political deadlock in the US, the FOMC minutes later today will be closely followed for hints on the Fed’s future course of action.

Pound Sterling – UK Markets

In a remarkable improvement to its April 2013 projections, the IMF upgraded the UK growth forecast to 1.4% for the current year while also raising its 2014 outlook citing recent signs of economic recovery amid higher consumer and business confidence. The IMF’s upbeat outlook lifted the Pound against the US Dollar yesterday. However, the upside was limited later in the day, as an end to the US budget impasse looked plausible after the US President reiterated his willingness to undertake measures to break the gridlock among policymakers. Meanwhile, Sterling is trading on a weaker footing in today’s morning session following the release of downbeat economic data from the UK. The industrial production report showed a larger than expected drop in overall output, while the trade deficit was apparently stagnant for August, raising concerns over Britain’s economic recovery. Apart from developments taking place on the US fiscal front, the NIESR GDP estimate and the FOMC minutes are expected to dictate trading sentiment in currency markets in today’s session.

US Dollar – US Markets

For a major part yesterday, the US Dollar continued its recent downward trend against the Euro before momentarily nudging higher in the latter part of the session. Apart from the ongoing fiscal woes, the overall economic situation in the US remains bleak, as the IMF lowered its growth projections for the world’s largest economy, warning that a protracted government shutdown will prove “quite harmful” to the economy. Meanwhile, two Fed officials have opined that improvements in the labour market seem "substantial enough" to begin QE3 tapering. Against this backdrop, minutes of the last Fed meeting will attract market attention in today’s trading session for ascertaining possible reasons for the Fed not tapering in September 2013. The greenback is trading on a firmer footing against the Euro this morning, despite the White House indicating that Barack Obama, will nominate Janet Yellen, a noted dove, to succeed as the next chairperson of the Fed later today. In the wake of House Speaker John Boehner rejecting Barack Obama’s softened stance of accepting a short-term increase in debt ceiling, investors are jittery and are likely to focus on events unfolding in the political arena for further direction to risk appetite.

Euro – European Markets

Apart from a late dip, the common currency moved steadily higher against the greenback yesterday, as woes for the US government seemed far from over, despite Barack Obama reiterating his willingness to negotiate in lieu of a temporary increase to the debt ceiling. However, the upside in the Euro was limited after data showed an unexpected drop in German factory orders, even though trade balance numbers came in better than expected, revealing the extent of a mixed economic recovery. Meanwhile, the Euro has surprisingly weakened against the US Dollar in today’s trading session ahead of today’s nomination of Janet Yellen, considered to have a dovish outlook, as the next head of the Federal Reserve. Later in the day, Germany’s industrial production report will be keenly eyed as it is expected to show a monthly rebound for August. This, along with the ongoing political logjam in the US, is likely to keep the Euro supported against the majors in today’s trading session. Additionally, comments from the ECB President, Mario Draghi and the FOMC minutes later today could prove decisive for the common currency.

Other Currencies – Highlights

Regardless of the largely upbeat domestic economic data, the Swiss Franc failed to gain traction against the US Dollar yesterday. While retail sales advanced more than expected for August, primarily on the back of improved non-food sales, consumer prices also inched marginally higher. Additionally, the unemployment rate held steady for September, indicating that the labour market is holding up well. Meanwhile, confounding logic, the Swiss Franc has weakened sharply against the greenback in today’s trading session despite pessimism surrounding the US economy of late. With no domestic economic data scheduled today, news flows emanating from both sides of the Atlantic will determine investors’ risk appetite going forward.