UK Inflationary Pressures Subside

The just released consumer prices data at home suggests that inflationary pressures on the economy are beginning to subside, although inflation remains firmly above the BoE’s comfort level of 2%. Meanwhile, in the aftermath of Mark Carney’s pledge to keep interest rates lower until unemployment falls to 7%, tomorrow’s minutes of the BoE meeting will provide more clarity on the influence the BoE Governor has on the voting pattern of the central bank’s MPC members. Across the Atlantic, the Fed will commence its two-day policy meeting today, with markets largely expecting a partial withdrawal of stimulus measures. Apart from the FOMC meeting, a string of macro releases in the US and Euro zone will keep traders on their toes today.

Pound Sterling – UK Markets

After climbing to a near eight-month high, the Pound moved lower against the US Dollar yesterday, as market focus shifted from Lawrence Summers withdrawal of his Fed candidacy to the two-day FOMC meeting beginning later today. Markets are pinning their hopes on the Fed trimming its asset purchases programme. In today’s trading session, Sterling is trading above the 1.59 mark against the US Dollar. The consumer price inflation report just out revealed that price pressures in the UK eased marginally for August, thereby leaving room for the BoE to adopt an easy policy stance. With growing doubts over the possibility of the BoE keeping interest rates low for a prolonged period, signs of easing inflationary pressures have managed to pacify such concerns. In the midst of growing focus over the BoE’s stance going forward, MPC member, Paul Tucker’s speech later today and tomorrow’s minutes of the BoE’s latest monetary policy meeting will shed some clarity on this front. Meanwhile, US consumer price inflation data and ZEW sentiment indices in Germany and Euro zone are expected to provide further direction to investors’ risk appetite today.

US Dollar – US Markets

Despite a lack of support from domestic cues in the recent past, the greenback staged a recovery against its peers yesterday and is trading close to its yesterday’s highs this morning, as traders await direction from the highly anticipated two-day FOMC meeting that is set to begin later today. Market participants appear to have braced themselves for a probable scaling down of the Fed’s $85 billion monthly asset purchases programme, thereby supporting demand for the US Dollar. With the perceived frontrunner, Lawrence Summers, withdrawing from the race to become the next Fed Chairman, there is growing speculation that the current Fed Vice Chairman Janet Yellen, viewed as supportive of the Fed’s loose monetary policy stance, could be appointed to the top post. Meanwhile, mixed results emerged from the manufacturing front yesterday, as US industrial output recovered for August, while New York’s regional manufacturing index unexpectedly slid for the current month. Against this backdrop, today’s consumer price inflation data in the US is keenly eyed and is expected to show an easing trend for August. Apart from domestic CPI, a slew of important Euro zone macro releases is expected to influence trading sentiment in today’s trading session.

Euro – European Markets

The common currency failed to gain traction against the US Dollar yesterday after the ECB President, Mario Draghi, reiterated his pledge to hold key interest rates at current or lower levels for an extended period. The ECB Chief also opined that the region’s economic recovery still remains fragile and high unemployment in the region was a cause of concern. Moreover, the revised Euro zone consumer price inflation numbers came in line with market expectations, thereby having little impact on trading sentiment. The weakness in the Euro can also be attributed to market speculation of a probable reduction in bond purchases by the Fed at its policy meeting beginning today. Meanwhile, the single currency has rebounded from yesterday’s lows against the greenback in today’s trading session ahead of the German and Euro zone forward looking sentiment indices which are expected to show an improvement for September. Any positive surprises in sentiment indices could keep the Euro further supported in today’s trading session. However, most of the market attention is on tomorrow’s outcome of the Fed’s policy meeting which is likely to determine the near term trend to currency markets.

Other Currencies – Highlights

The Australian Dollar has failed to sustain the recent upward momentum against the greenback this morning, as risk appetite for high yielding currencies faded ahead of the FOMC meeting beginning today, wherein the Fed in all likelihood, is expected to trim its bond buying programme. Meanwhile, the minutes of the Reserve Bank of Australia’s latest policy meeting released earlier today showed that the central bank was in favour of a declining exchange rate which supports the nation’s export oriented economy, while also keeping the option of reducing interest rates further to support the economy. With no domestic economic triggers on tap today, the Aussie Dollar will take direction from news flows emanating from both sides of the Atlantic. Furthermore, investors will eye tomorrow’s domestic sentiment indices and the outcome of the Fed’s meeting for further direction to risk appetite.