Europe Continues to Struggle

The ECB Chief continues to maintain a dovish tone, as he indicated that the central bank would infuse a fresh round of liquidity if required, in line with its previous refinancing operations for banks. Today’s weak Ifo sentiment data in Germany, coupled with yesterday’s downbeat manufacturing PMIs across Europe, have strengthened market belief that Europe is still not out of the woods. At home, a modest growth in mortgage applications has further validated the pickup in the domestic economy in recent months. Meanwhile, comments from Fed officials continue to highlight the indecisiveness among policymakers concerning the appropriate timing to begin tapering QE3. Today’s US economic data is likely to shed further light on this front.

Pound Sterling – UK Markets

The Pound managed to stay above the 1.60 mark against the US Dollar in a rather quiet trading session yesterday. In the aftermath of the Fed extending QE3 last week, contrasting comments by various Fed officials over the past two days has resulted in heightened uncertainty over the Fed’s future policy stance. Meanwhile the BoE policymaker, Ben Broadbent, defended the central bank’s decision to link monetary policy measures with the nation’s labour market, though he added that the central bank’s guidance did not represent an unconditional promise to maintain monetary policy unchanged for a fixed period of time, thereby leaving prospects of an interest rate hike alive. Against this backdrop, speeches by influential policymakers from the BoE will be closely eyed later today. In today’s trading session, Sterling is trading in a tight range against the majors. Data just released has showed a modest pickup in appetite for mortgage loans for August, reflecting improved sentiment in the domestic housing sector. Later today, key macro releases from the US will be followed for further direction to risk appetite.

US Dollar – US Markets

Despite the Fed’s stance to refrain from a partial withdrawal of the current monetary stimulus, disparity in views expressed by various Fed officials suggests that prospects of tapering QE3 could be a close call in the next FOMC meeting scheduled in October. While the President of the Atlanta Fed and the New York Fed indicated that the economy was still too weak to warrant a reduction in the central bank’s ultra loose monetary policy, the Dallas Fed President questioned the credibility of the Fed not tapering QE3 last week. Meanwhile, yesterday’s downbeat manufacturing PMI is the latest in a run of recent ambiguous macro data that has confounded markets as to the strength of the US economy. The greenback has moved marginally higher against the Euro this morning following broadly weak German sentiment indices for September. Against the backdrop of yesterday’s weak manufacturing PMI reading in the US, the Richmond Fed manufacturing activity data later today will give further insights into the performance of the regional manufacturing sector. Additionally, consumer confidence and S&P/Case-Shiller home price data will be eyed for further hints on the probable timing of QE3 withdrawal.

Euro – European Markets

The Euro weakened against the US Dollar yesterday following weak manufacturing PMI releases across the Euro zone. A marginal improvement in the services sector for September was not sufficient to limit losses in the common currency against the majors. The common currency was further weighed down by comments from the ECB President, Mario Draghi, who reiterated that in order to keep borrowing rates low and support the region’s fragile recovery, the central bank will resort to additional liquidity measures such as long term refinancing operations, if needed. However, in a further boost to the German Chancellor, the Bundesbank’s monthly report indicated that the economy will continue to expand in the second half of this year. In today’s trading session, the Euro has failed to register gains against the US Dollar, as weak Ifo business sentiment data in Germany earlier today reminded traders that more needs to be done in the Euro zone’s largest economy to sustain growth. With little on the European economic calendar today, consumer confidence data in the US later will be eyed, especially in the wake of renewed uncertainty among traders over the Fed’s QE3 tapering plans.

Other Currencies – Highlights

The Swiss Franc failed to gain traction against the US Dollar yesterday despite a largely weak set of economic data from across the Atlantic. The wide divergence of opinion within the US Fed over the continuation of QE3 has puzzled market participants. Meanwhile, the President of the Swiss National Bank, Thomas Jordan, has opined that the upper cap on the Swiss Franc against the Euro is a crucial monetary policy tool forged in order to limit downside risks of deflation and recession to the economy. With no domestic economic indicators to trigger risk appetite, the Swiss Franc will take direction from news flows emanating from both sides of the Atlantic in today’s trading session. Later this week, the Swiss UBS consumption and KOF leading indicator will be eyed for further direction to the Swiss Franc against the majors.