Merkel’s Win Ensures Policy Continuity

The German Chancellor, Angela Merkel’s victory over the weekend elections has ensured the extension of the Euro zone’s current policies in dealing with the region’s debt crisis. Although more efforts will be required by Merkel to form a coalition government, the overwhelming mandate has suggested the nation’s confidence in her way of handling the European economic turmoil. However, sluggish manufacturing PMIs across Europe revealed that economic worries still prevail and more efforts will be required to get their house in order. Going forward today, markets eye some US manufacturing data and speeches by a few Fed officials for further direction to risk appetite. At home, revised GDP data later this week will gain market attention.

Pound Sterling – UK Markets

In a rather lacklustre trading session on Friday, the Pound moved steadily lower against the US Dollar after a Fed official indicated that there remains a distinct possibility of the Fed withdrawing a part of its stimulus measures by October. Meanwhile, a report on the UK public finances showed that net government borrowing rose at a slower than expected pace for August, highlighting better management of finances by the government. After momentarily slipping below the 1.60 mark against the greenback, Sterling has made up ground and is trading on a stronger footing this morning. Additionally, the Pound-Euro pair has gained traction this morning on the back of weak manufacturing data across Europe. With little on the domestic economic calendar to alter market sentiment, Sterling traders are expected to follow US economic data and comments from a few Fed officials later today for further cues to risk appetite. Going forward, this week’s domestic mortgage approvals, final reading of the second quarter GDP and consumer confidence data will provide further hints on the overall progress of the economy.

US Dollar – US Markets

The US Dollar has gained some momentum against the Euro in today’s trading session, as weak manufacturing data from the Euro zone has re-instilled concerns over the region’s economic recovery. However, uncertainty about a solution to the US debt ceiling issue could trigger fresh woes for the US economy and could limit the upside for the greenback in the near term. Meanwhile, the decision to maintain the pace of bond purchases by the Fed does not seem to be a unanimous one, as dissenting voices have started emerging. The Kansas City Fed President and a noted hawk, Esther George, voiced her objection towards the Fed’s latest move, while the St. Louis Fed President, James Bullard, indicated that the central bank could start tapering QE3 as early as next month. In today’s session, manufacturing indicators from the US will attract market attention. Additionally, comments from a few key Fed policymakers will be eyed for gauging the probability of the central bank scaling back its stimulus at its meeting scheduled in October.

Euro – European Markets

The German Chancellor, Angela Merkel’s convincing performance in the elections over the weekend has lifted market sentiment with regards to the continuation of existing policy measures in the currency bloc. It remains to be seen what sort of a coalition government comes into power, as party leaders begin coalition talks later today. However, downbeat manufacturing PMI releases across Europe have taken the sheen off from the initial optimism surrounding the German election results, thereby weakening the single currency against its major counterparts in today’s session. Data showed that the French manufacturing activity remained in the contraction phase, while manufacturing PMI in Germany and the Euro zone grew at a slower than expected pace for September. With the ECB President, Mario Draghi’s speech being the only major domestic event on tab today, market participants will also eye the US manufacturing PMI later today for further direction. Looking ahead, a raft of economic releases, including the German and Euro zone business and consumer sentiment indicators, will gain significant market attention during the course of this week.

Other Currencies – Highlights

The Canadian Dollar traded in a tight range against its US counterpart on Friday, as the upside was limited amid speculation of the Fed scaling back its bond buying programme next month. Gains in the Canadian Dollar were further capped following the release of the August inflation report which showed that consumer price inflation in Canada eased for the first time in four months, still within the target rate set by the Bank of Canada. The cooling inflation trend has put to rest expectations of the central bank raising borrowing costs in the near term, thereby weighing on the demand for the Canadian Dollar. With no major domestic economic releases on the radar today, manufacturing data across the Atlantic will be closely tracked for further direction. Additionally, traders will keep a tab on tomorrow’s retail sales data in Canada for insights into the spending pattern of consumers.