Action Packed Week Ahead

Although US lawmakers reached a stop-gap arrangement to end the budget impasse, the very nature of the temporary deal has kept the door ajar for another political showdown in the near future. The prolonged shutdown has elevated downside risks to the US economy and fuelled expectations of the Fed continuing with its QE3 programme, leading the greenback to feel the pinch against the majors. In the UK, this week’s BoE minutes and GDP data will assist investors in gauging the central bank’s policy stance going forward. After all the political wrangling lately, an eventful week lies ahead as a raft of key global macro releases will keep traders on their toes.

Pound Sterling – UK Markets

After breaching the 1.62 mark in the initial trading session against the US Dollar on Friday largely due to rising expectations that the Fed might delay scaling down its asset purchases programme in the aftermath of the US government shutdown, Sterling moved lower in the latter part of the session. In the meantime, BoE policymaker, Ben Broadbent, opined that the central bank will consider raising borrowing costs only after assuring that UK economic recovery is secure. Against this backdrop, the BoE minutes later this week will be keenly eyed for further insights into the central bank’s outlook towards the economy. Meanwhile, the Pound has limited its downside against the majors this morning after data released by Rightmove revealed a rise in UK house prices for October, as recovery in the housing sector continues to gather momentum aided by supportive government schemes. With a relatively light global economic calendar today, Sterling investors will keep a tab on tomorrow’s UK public finances data for further direction. Furthermore, Friday’s third quarter GDP data will be keenly watched and any positive surprise on this front has the potential to breach crucial resistance levels in Sterling against the majors.

US Dollar – US Markets

Selling pressure continued to undermine the US Dollar on Friday, as traders weighed the impact of the prolonged government shutdown on the economy. Adding to the recent comments from various Fed officials about the central bank’s potential policy stance going forward, the Chicago Fed President, Charles Evans, stated that low inflation and “unacceptably high” unemployment does not warrant trimming the monthly stimulus programme in the near term. However, the US Treasury Secretary, Jacob Lew, has said that although he believes the shutdown has generated unnecessary headwinds, the US economy was resilient enough to recover from the blow. Meanwhile, the US Dollar is trading in a tight range against the majors in today’s trading session ahead of US existing home sales data later today which is expected to show a monthly drop for September. However, most market attention is focused on tomorrow’s delayed, but important non-farm payrolls data for September and a positive employment print is expected to offer some support to the US Dollar against the majors, as it will bring forward market expectations of QE3 tapering.

Euro – European Markets

Buoyed by global economic events, the common currency moved closer to the 1.37 mark against the greenback on Friday. With the Fed likely to defer trimming its monthly bond buying programme at its meeting later this month, risk sentiment remained supported in markets, resulting in increased demand for high yield currencies. Additionally, encouraging Chinese GDP data for the third quarter limited downside risks in the Euro against the US Dollar. Meanwhile, in Germany, the country’s two largest parties looks set to form a coalition government after the Social Democrats party agreed to enter into talks with Angela Merkel’s bloc. In the meantime, the single currency has failed to gain traction against the majors in today’s trading session, as market participants await a raft of decisive economic data later this week. With little on the domestic front to alter market sentiment, investors will eye US existing home sales later in the day for further direction. In the week ahead, a slew of manufacturing and services PMIs across the Euro zone and German business sentiment data, along with the barrage of delayed US government economic reports will influence direction in the Euro-US Dollar pair.

Other Currencies – Highlights

The Japanese Yen has weakened against the majors this morning after the nation posted a bigger than expected trade deficit for September on the back of slowing exports and mounting import costs, as higher energy prices continued to take a toll on the Japanese trade account. The rising demand for fuel owing to the shutdown of nuclear reactors in Japan, coupled with a weaker currency, has raised the nation’s imports cost substantially over the past year. The Japanese Yen was further pressurised after the Bank of Japan Governor, Haruhiko Kuroda, reiterated his pledge to continue with stimulus measures to achieve stable inflation. With no major domestic economic data on tap, the Japanese Yen will take direction from global economic news flows in today’s trading session, especially the US housing market report. Later this week, Japan’s consumer price inflation data and a host of macro releases from both sides of the Atlantic will prove crucial for the Japanese Yen against the majors.