Though the just released UK second quarter annual GDP growth has been revised lower, recent upbeat macro releases should strengthen hopes that economic recovery for the third quarter remains intact. Furthermore, consumer confidence data late tonight is expected to show that higher spending translated into upbeat consumer morale for September.
Turning focus to the US, the nation looks to be heading towards another showdown on the debt ceiling issue, even as macro data continues to confound investors over the Fed’s next policy move. A raft of significant economic releases from across the Atlantic, especially revised GDP and jobless claims, will keep market participants on their toes today.
Pound Sterling – UK Markets
The recovery in the UK economy has rubbed off on consumer spending, as CBI retail sales surprisingly climbed to the highest level since June 2012 on the back of strong furniture and carpet sales, thereby leading the Pound to move above the 1.60 mark against the US Dollar yesterday. Moreover, the standoff in the US over raising the government’s debt ceiling kept the greenback under pressure, thereby supporting the Pound-US Dollar pair.
However, Sterling is trading lower against both the US Dollar and the Euro this morning, after the final reading of annual UK GDP was revised downwards for the second quarter. Additionally, the current account deficit has narrowed less than expected for the second quarter. In light of higher domestic spending, today’s late night consumer confidence report will be keenly watched and is expected to show a positive surprise for September. Additionally, important US economic data later today will be eyed by traders for further hints to the timing of QE3 tapering. Furthermore, speeches by influential policymakers from both sides of the Atlantic will provide direction to Sterling against the majors today.
US Dollar – US Markets
The possibility of another Congressional face-off on raising the government’s spending limit dragged the greenback lower against its major peers yesterday. Furthermore, Jacob Lew, the US Treasury Secretary, warned that extraordinary measures adopted to avoid breaching the debt ceiling will be exhausted in mid-October 2013, further pressurising the US Dollar. Also, yesterday’s economic data indicated that demand for core durable goods unexpectedly declined for August, highlighting troubles in the manufacturing sector. However, a positive new home sales report has shown resilience in the housing sector despite higher mortgage rates.
In today’s session, the US Dollar is trading in a tight range against the Euro ahead of the crucial initial jobless claims report later today, which is expected to show that the number of people filing for jobless benefits rose for the previous week. Apart from jobs data, the final reading of the second quarter GDP and pending home sales data will be eyed for further direction to risk appetite. Any unexpected deterioration in these numbers will put pressure on the greenback, as it will strengthen hopes of a continuation of bond purchases in the near term.
Euro – European Markets
The upbeat German consumer outlook towards the economy lifted the Euro against the greenback, which moved above the 1.35 level yesterday. Data showed that the GfK consumer confidence index rose to its highest level in six years for October. Also, concerns over the US budget ceiling underpinned demand for the Euro. Additionally, the European Commission President, Jose Barroso, presented an optimistic view of the region’s economy, as he opined that the economy is strengthening and that the single currency will emerge stronger as the region recovers from its prolonged recession.
In the meantime, weak revised second quarter UK GDP data provided slight traction to the Euro against the Pound this morning and it may consolidate gains, especially considering a light European economic calendar today. Traders in the Euro-US Dollar pair have adopted a cautious approach this morning ahead of today’s US initial jobless claims and GDP data that will provide further insights into the Fed’s likely decision on QE3. Going forward, markets await tomorrow’s confidence indices in the Euro zone for further direction to the Euro against the majors.
Other Currencies – Highlights
The Japanese Yen limited its recent upward momentum against the greenback this morning amid reports that the Japanese government is planning to begin a study on cutting the effective corporate tax rate. Any reduction in corporate tax rate will put further strain on the government’s balance sheet, thereby eroding the appeal of the Japanese Yen against the majors. In the past few trading sessions, demand for the Yen had increased, as uncertainty surrounding the Fed’s QE3 tapering plans grew and weighed on the performance of riskier assets. Today’s important US economic releases, including jobless claims and the second quarter GDP, will provide further direction to risk sentiment.
Going forward, Japan’s consumer price inflation numbers early morning tomorrow will be keenly watched by investors, particularly in the wake of the Bank of Japan’s pledge to lift inflation to 2% and its impact on Shinzo Abe’s stimulus plans. Additionally, news flows emanating from both sides of the Atlantic will give further direction to the Yen against the majors.
British Pound Suffers Losses Ahead of Tuesday's Critical Vote