Summers Exit Changes Equation

The withdrawal of candidacy for the post of the Fed Chairman by Lawrence Summers, seen as a more hawkish alternative, has heightened speculation that the incoming successor might be leaning in favour of maintaining QE3 for a longer than expected period. This, coupled with Friday’s weak US macro numbers, has supported high yield currencies. Meanwhile, US industrial production data is the only relevant economic indicator today ahead of the crucial Fed policy meeting later this week, which could bring volatility to currency markets. At home, minutes of the BoE’s last policy meeting, scheduled this week, will be keenly eyed and will provide insights into the central bank’s outlook on the economy and the voting pattern of policy members.

Pound Sterling – UK Markets

The Pound has continued to trend higher, breaching the 1.59 mark and climbing to a near eight-month high against the US Dollar this morning after the former US Treasury Secretary, Lawrence Summers, pulled out of the race to be the next chairman of the Fed, dimming prospects of an early end to the quantitative easing policy. Meanwhile, outlook for the domestic housing sector remains positive, as Rightmove has forecast home prices in the UK to climb for 2013, aided by supportive government policies. For the week ahead, minutes of the BoE’s latest policy meeting will be keenly followed for hints on the central bank’s outlook towards the economy. Robust jobs data last week has undermined the credibility of the Governor’s forward guidance and has reinforced apprehension on the sustainability of the BoE’s loose policy stance. In the wake of recent upbeat domestic economic data, the UK consumer price inflation and retail sales data will be eyed for gauging the effects of overall price pressure on consumer spending.

US Dollar – US Markets

Friday’s Reuters/Michigan consumer sentiment index showed a more than expected deterioration in consumer confidence, despite the largely upbeat economic data lately, thereby providing a boost to market speculation that QE3 might continue for a longer than expected period. The low morale has subsequently resulted in reduced consumer spending, as pointed out by dismal retail sales data for August. The recent set of weak US economic data has provided all the necessary ingredients to the Fed for adopting a wait and watch approach at its crucial policy meeting scheduled this week. The greenback has moved further lower against its major counterparts in today’s trading session following the withdrawal of Lawrence Summers from the race to head the US central bank. The former US Treasury Secretary’s policy views are considered to be more hawkish compared to the presumed second choice, Fed Vice-Chairman Janet Yellen. With market focus firmly fixated on the outcome of the FOMC two-day policy meeting later this week, today’s industrial and manufacturing production data is expected to gain modest market interest.

Euro – European Markets

The Euro lacked conviction against the US Dollar on Friday amid continuing uncertainty over the strength of the Euro zone recovery following a recent mixed bag of macro data. Although investors are expecting some kind of trimming by the Fed to its QE3 programme later this week, Friday’s weak US macro data has led to ambiguity with regards to trading in the Euro-Dollar pair. Meanwhile the ECB policymaker, Yves Mersch, indicated that the Euro zone is showing positive signs of economic recovery, but stressed the need for a continuous pace of fiscal consolidation to confirm the region’s growth. The common currency has received a boost against the greenback in today’s trading session following Lawrence Summers’ withdrawal from the candidacy to be the next Fed Chief. Going forward today, the Euro looks to consolidate above the 1.33 mark against the US Dollar amid a lack of domestic triggers to risk appetite. Market participants have the revised consumer price inflation data in the Euro zone to focus upon later in the day, which is expected to match preliminary estimates. Later this week, apart from the Fed’s policy meeting, sentiment indices in the Euro zone and Germany will be eyed for further direction.

Other Currencies – Highlights

The New Zealand Dollar is trading stronger against the greenback, as risk sentiment improved after the former US Treasury Secretary, Lawrence Summers, quit the race to be the next Fed Chairman, boosting demand for high yield currencies. However, upside in the Kiwi Dollar was capped following deterioration in domestic consumer confidence and services PMI data released earlier today. Later today, industrial output data in the US will be eyed by traders for hints to the prevalent economic condition in the world’s largest economy ahead of the Fed policy meeting later this week. With the second quarter GDP data being the only major economic domestic release during the week, news flows emanating from both sides of the Atlantic, especially the Fed policy meeting, will influence risk sentiment among traders.