Rest Day after Fiscal Mayhem

Uncertainty concerning the US fiscal logjam temporarily ended yesterday, with the government functioning to its full potential after a 16-day enforced mini-break. However, the lingering effects of the damage caused to consumer and business sentiment will be felt for some time to come. In this context, comments from Fed policymakers later today will be scrutinised for hints on the potential of QE3 tapering ahead of the policy meeting later this month. Meanwhile, after a brief slowdown, the Chinese economy appears to have gained steam, as indicated by the GDP data released earlier today. At home, next week’s third quarter GDP report is expected to confirm that the nation has taken forward strides towards achieving sustained economic recovery.

Pound Sterling – UK Markets

Yesterday, the Pound strengthened against the majors and climbed above the 1.61 mark against the US Dollar to the highest level in almost a month, buoyed by an upbeat domestic retail sales report and expectations of the Fed maintaining status quo on its ultra loose monetary policy in its meeting later this month. The recovery in Britain’s labour market and housing sector seems to have trickled through to the broader economy, as September retail sales numbers comfortably beat market estimates, primarily due to robust demand for household goods. With recent economic data proving to be largely upbeat, better-than-expected GDP numbers for the third quarter next week could extend the positive sentiment. Meanwhile, Sterling is trading in a tight range against its peers this morning amid a lack of domestic economic triggers. Apart from the GDP report, market participants are looking forward to the minutes of the BoE’s last policy meeting next week for further direction. Additionally, Sterling investors will keep an eye on a string of other important domestic and global macro data for determining risk appetite.

US Dollar – US Markets

Given the temporary nature of the US debt ceiling deal agreed upon, the greenback dropped to multi-month lows against its major counterparts yesterday. Market speculation that the Fed is likely to delay tapering QE3 in the aftermath of the prolonged government shutdown continued to weigh on the US Dollar. Moreover, weaker than expected initial jobless claims numbers also supported the prospect of such an event unfolding. With several Fed officials also echoing similar views over the last few days, loose monetary policy in the US looks set to continue, at least for the foreseeable future. Meanwhile, the US Dollar has continued to trade under pressure against the majors in today’s trading session, reflecting dampened sentiment towards the greenback. With no domestic economic data scheduled for release today, speeches by a few Fed officials will be eyed for hints to the policy outlook. In the forthcoming week, investors will look forward to some important economic data, along with the expected non-farm payrolls report, which has been delayed due to the government shutdown for further direction.

Euro – European Markets

The single currency continued its upward momentum after breaching the 1.36 mark against the US Dollar yesterday, tracking general “risk on” sentiment among investors. Also, fears that the prolonged US shutdown has taken its toll on an already fragile US economic recovery prompted traders to shun the greenback, aiding the common currency. The Euro also remained supported due to increased bets that a decision to reduce stimulus measures by the Fed will be delayed until next year. On the domestic front, data showed that construction output in the Euro zone grew for the fifth consecutive month for August, fuelling expectations of a revival in the region’s economic fortunes. The common currency is trading marginally higher, albeit in a tight range, against the greenback this morning. With not much on the global economic calendar, speeches by a few Fed officials will drive market sentiment in today’s trading session. Moving forward, a barrage of domestic economic data scheduled next week, including manufacturing and services PMIs and confidence indices, will provide further insights into the strength of the region’s recovery.

Other Currencies – Highlights

“Risk-on” sentiment propelled the Canadian Dollar higher against its US counterpart yesterday after US lawmakers announced a temporary ceasefire by passing a bipartisan bill. The Canadian Dollar was further aided amid speculation that the US Fed might maintain its bond buying programme in a bid to compensate for the disruption in economic growth triggered by the shutdown. Meanwhile, the Canadian Dollar is searching for direction against the majors in today’s trading session ahead of the domestic consumer price inflation data later in the day, one of the dual mandates in the Bank of Canada’s policy framework. Market participants expect inflationary pressures to firm up for September, after easing marginally for the previous month. However, lacklustre domestic and global growth is unlikely to push the Bank of Canada to raise borrowing rates in its policy meeting next week. Apart from the policy meeting, domestic retail sales and a raft of US economic data will prove crucial in determining the trend in the Canadian Dollar against the majors.