Markets Eye US for Clarity

As expected, both the BoE and the ECB maintained their policy stance yesterday. The ECB President acknowledged the recent moderate pace of recovery and promised to keep monetary policy loose for an extended period of time. In a similar move, the BoE left its bond-buying programme unchanged as it continues to assess the effects of forward guidance unveiled last month. Meanwhile, disappointing industrial production and trade balance figures have arrested the recent flow of positive surprises from the UK. With the week drawing to a close, the all important US non-farm payrolls report will play a pivotal role in deciding the trend for markets today, given its influence of the Fed’s monetary policy decisions.

Pound Sterling – UK Markets

The Pound failed to build on its early momentum yesterday and weakened against the US Dollar after better than expected US jobless claims and services sector data strengthened the case for the Fed to scale back its monetary stimulus later this month. Meanwhile, as expected, the BoE kept its monetary policy steady, in line with its forward guidance implying that the central bank will not hike interest rate at least until the unemployment rate falls below 7%. Against this backdrop, next week’s UK unemployment data will be keenly awaited. Sterling moved higher against the Euro after Mario Draghi maintained that the ECB’s monetary policy will remain accommodative for a long time. Meanwhile, just out, lacklustre domestic factory output and trade data have dampened investor sentiment and dragged the Pound lower against the greenback. While the NIESR GDP estimate for the UK will be released later today, the US non-farm payrolls data will undoubtedly hog the limelight, especially after yesterday’s upbeat jobless claims numbers.

US Dollar – US Markets

The largely upbeat US labour market data along with the better than expected services sector report lifted the US Dollar against its peers yesterday. The initial jobless claims fell more than expected, while the ISM non-manufacturing PMI unexpectedly rose in January to its highest level since inception. Moreover, the Dallas Fed President, Richard Fisher, maintained his hawkish stance, thereby further validating belief of the central bank tapering its asset purchases later this month. Traders took the greater than forecast drop in ADP employment in their stride following the release of the dual upbeat data. In today’s trading session, the US Dollar is looking for direction against the Euro ahead of the non-farm payrolls data later today. However, any positive surprises with regards to payroll numbers will keep the greenback supported in today’s trading session. Apart from the non-farm payrolls report, speeches by a couple of Fed officials will also keep markets interested today. Going forward, retail sales and the Reuters/Michigan consumer sentiment index will be the primary attraction next week.

Euro – European Markets

The Euro weakened against the majors yesterday after the ECB President, Mario Draghi, reiterated his earlier pledge that policy will remain accommodative for as long as necessary. He also stated that the bank will not shy away from reducing borrowing costs further, in case money market rates rise too high to support the recent economic recovery. The common currency came under further pressure against the US Dollar following the release of upbeat US jobless claims and services activity data which boosted calls for the Fed to taper its QE3 programme later this month. Meanwhile, the single currency is trading in a tight range against the US Dollar in today’s trading session. Data released earlier today revealed that Germany’s trade surplus narrowed more than expected for July on the back of dwindling exports and rising imports. Later today, German industrial production data will be keenly followed by traders to ascertain the health of the manufacturing sector in the Euro zone’s largest economy. Also, non-farm payrolls data from the US will be widely watched and will influence market sentiment in today’s session. Furthermore, next week’s ECB monthly report and some important economic releases will provide further direction to the Euro.

Other Currencies – Highlights

Upbeat US macro data added to speculation that the economy might not need an $85 billion stimulus per month, thereby weakening the Canadian Dollar against its US counterpart yesterday. However, the Canadian Dollar has pulled back from yesterday’s lows and is trading stronger against the greenback in today’s session ahead of the Canadian labour market and business conditions data scheduled later today which are expected to show an improvement. Meanwhile, in a bid to support economic growth, the Bank of Canada had kept its key interest rate unchanged at its policy meeting held earlier in the week. With the Canadian economy closely correlated with its southern neighbour, the US non-farm payrolls data later in the day will also sway market sentiment towards the Canadian Dollar.