UK Economy Maintaining Impetus

The much awaited third quarter GDP report has shown that the UK economy is on the sunny side of reality led by performance across all main industries and corroborates the recent upbeat economic data. The encouraging GDP numbers have increased speculation of the BoE Governor raising rates sooner than expected. Across the Atlantic, today’s durable goods orders and consumer confidence data will provide further food for thought to US policymakers on the probability of tapering QE3 in the near term. Across Europe, the region’s largest economy has shown an unexpected deterioration in business sentiment for October, in sync with yesterday’s dismal PMI data.

Pound Sterling – UK Markets

The Pound limited its downside versus the US Dollar yesterday, as Sterling continued to be the beneficiary of dismal macro data in the US, which strengthened hopes of loose monetary policy in the world’s largest economy for the foreseeable future. However, yesterday’s data indicating an unexpected deterioration in the CBI manufacturing orders for October raised doubts over the performance of the manufacturing PMI scheduled for release next week. Meanwhile, Mark Carney promised households that the BoE will not rush to raise interest rates, or withdraw stimulus support to the economy, citing a lack of “traction” in the economic recovery. Sterling has continued its good run against the US Dollar this morning after data just released showed that the UK economy grew at a sequential pace of 0.8% for the third quarter, in line with estimates, thereby reflecting green shoots in the economy during the period. The upbeat report provides further evidence that the UK economy is slowly transcending from a recovering economy to a growing economy and is likely to support the Pound in the session ahead. With no more domestic events featuring on the economic calendar today, news flows emanating from across the Atlantic will provide further direction.

US Dollar – US Markets

The US economy continues to feel the ripple effects of the partial government shutdown as reflected in yesterday’s lacklustre economic releases, leading the US Dollar to trade under pressure versus its major counterparts. Data showed that manufacturing activity grew at its slowest pace this year as factory output fell for the first time since 2009, while initial jobless claims dropped less than expected last week. Against this backdrop, investors will look forward to today’s Reuters/Michigan consumer confidence and durable goods orders data for further insights into the health of the economic recovery in the world’s largest economy. In today’s trading session, the US Dollar has failed to gain traction versus the Euro and the Pound, as economic reports continue to reinforce hopes that the US Fed might delay tapering its stimulus measures until next year. While the current US economic situation calls for continuing QE3 measures to keep the weak recovery underpinned, the FOMC policy decision next week will be on traders’ radar for a clearer indication on the same. Market participants expect the Fed to keep its loose policy in place, as it assesses damage caused to the economy by the prolonged government shutdown this month.

Euro – European Markets

The single currency pared gains against the Pound, as weaker-than-expected PMI readings in the Euro zone poured cold water on the “risk-on” sentiment in the former. The sluggish manufacturing and services PMI prints, albeit largely in the expansion territory, suggests that the ECB needs to do more to maintain a sustained level of economic recovery. However, dismal macro data across the Atlantic strengthened hopes of a delayed taper to the US Fed’s monthly bond buying plan, keeping the Euro around the 1.38 mark versus the US Dollar yesterday. Meanwhile, the Euro has continued to hover above the 1.38 mark against the US Dollar this morning despite data earlier today indicating that the Ifo business sentiment in Germany surprisingly deteriorated for October. This, along with yesterday’s weak PMI readings, has raised questions against recent market optimism over the health of the region’s largest economy. While macro data releasing in the US later today is expected to determine direction in the Euro-US Dollar pair, a raft of domestic as well as global economic releases scheduled next week will be gauged for further cues to risk appetite.

Other Currencies – Highlights

The Japanese Yen gained traction versus the US Dollar this morning, as downbeat US economic data kept the latter under broad selling pressure amid speculation that the US Fed might hold back from scaling back its asset purchases until next year. The Japanese Yen also strengthened, as overnight data showed that Japan’s annual consumer price inflation rose to the highest level in five years in September. This suggests that the Japanese Prime Minister, Shinzo Abe’s ultra-loose policy is yielding results in ending the deflationary phase in the economy. In this context, the Bank of Japan’s policy meeting next week will be keenly eyed for ascertaining the central bank’s future policy stance. In another development, Taro Aso, the Finance Minister of Japan, indicated that the country’s third quarter GDP data next year will be a major deciding factor for raising the nation’s sales tax to 10% from 8% percent in 2015. Going forward, the Japanese Yen will take direction from news flows emanating from the US.