The UK economy looks to have suddenly “caught a cold”, as evident from the latest bout of disappointing economic data at home. This is in sync with Mark Carney’s assessment of the economy last month and will help in easing speculation of an early hike in interest rates. Against this backdrop, the BoE is likely to adopt a wait and watch approach at its meeting later today.
Meanwhile, the US is taking steps towards finding a solution to its recent woes, as lawmakers are willing to come to the negotiating table. Additionally, QE3 tapering appears to be on the horizon after the FOMC minutes released yesterday revealed growing consensus on the same.
Pound Sterling – UK Markets
While last week’s below par UK PMI prints brought some anxiety, yesterday’s dismal factory output and weaker than expected trade deficit numbers sparked a sell off, weakening the Pound against the majors and slipping below the 1.60 mark against the greenback to a three week low. Market sentiment was further dented after the NIESR estimated that the UK economy grew at a slower pace for three months to September and stated that although recession is over, the period of depression is likely to persist for some time. Against this backdrop of a slightly downbeat economic scenario, the BoE is expected to keep its monetary policy stance unchanged at current levels today, until economic recovery demonstrates stability.
Meanwhile, Sterling has continued to remain under pressure against the greenback this morning amid hopes of a short term solution to the US fiscal impasse and fears of an early withdrawal of QE3 following yesterday’s FOMC minutes. Apart from the BoE meeting later today, investors will keep a close tab on events unfolding in the US for further direction to risk appetite.
US Dollar – US Markets
Although the Fed’s decision not to taper QE3 in its September meeting defied logic at that time, the move has proved to be a boon in disguise, given the crippling effect the subsequent partial government shutdown is having on the US economy. However, minutes of the last meeting revealed that while it was a close call to defer tapering, most policymakers agreed to scale back stimulus measures later this year. Also, media reports indicated that Congressional leaders are mulling a short term increase in the debt limit, thereby avoiding a possible US default. The twin upbeat news lifted the greenback from multi-month lows against the majors in yesterday’s trading session.
The greenback has continued its upward momentum in today’s trading session despite the nomination of dovish Janet Yellen as the next Fed chief by Barack Obama. Meanwhile, in the wake of recent developments in the US, traders will closely follow talks related to debt and budget impasse, along with today’s initial jobless claims report, for further direction to risk appetite. Any sign of conciliation among lawmakers is likely to provide a further boost to the greenback against the majors in the near term.
Euro – European Markets
The common currency weakened against the US Dollar yesterday amid signs of the US economy coming closer to breaking the political deadlock. While US lawmakers’ willingness to approve a short term extension to the borrowing limit lifted market sentiment, the minutes of the latest Fed meeting suggested growing accord among policymakers to scale back the central bank’s ultra loose monetary policy later this year. The upbeat German industrial production report also failed to offer any support to the Euro, as high yield currencies bore the brunt of buoyant investor sentiment towards the US Dollar. Meanwhile, after being in the news for all the wrong reasons lately, the Italian cabinet approved measures to curb the nation’s budget deficit below the European Union's ceiling.
Meanwhile, the single currency is trading lower, albeit in a tight range, against the greenback in today’s session despite the just released ECB monthly report indicating rising expectations of a pickup in the region’s economic activity. With Mario Draghi’s speech being the only potential domestic economic trigger for the day, events unfolding across the Atlantic will grab market attention today.
Other Currencies – Highlights
The Australian Dollar is trading under pressure against its US counterpart this morning on improved prospects of US lawmakers reaching an agreement on the debt ceiling and expectations of the Fed scaling down its bond purchases before the end of this year. The Aussie Dollar weakened further after the domestic labour market report released earlier in the day showed that the number of job additions rose less than expected for September, even though the unemployment rate unexpectedly declined.
With no domestic economic data scheduled during the week, the movement in the Australian Dollar will be impacted by news flows emanating from both sides of the Atlantic. Furthermore, investors will keep a tab on the RBA minutes and business confidence data next week for further direction to risk appetite. Additionally, a raft of Chinese economic data over the weekend and next week will prove crucial for the Australian Dollar against the majors.
Sterling Rises Sharply on Renewed Hopes of the UK Leaving With a Deal
Dollar Rises Modestly on FOMC Minutes
Sterling Rises on Hopes of EU Softening Tone on Backstop