UK Continues to March Ahead

Despite yesterday’s downwardly revised second quarter GDP data, Mark Carney sounded confident about the economy, as he ruled out further easing measures for the economy earlier today. His optimistic view was supported by encouraging consumer confidence and house price data. The overall positive economic environment is expected to boost calls for raising interest rates before the scheduled target. Across the Atlantic, most of the market attention is focused on budget negotiations, especially considering the fast approaching deadline. Moreover, markets expect some direction on QE3 tapering plans from today’s economic data and comments from few Fed policymakers later today. In Europe, the renewed political uncertainty has kept investors on the edge.

Pound Sterling – UK Markets

After flirting with the 1.61 mark for a brief period, Sterling moved lower against the US Dollar yesterday following a weaker than expected final reading of UK GDP for the second quarter. Weakness in the Pound yesterday was also attributed to higher demand for the greenback, as upbeat US jobless claims data rekindled hopes of the Fed tapering QE3 soon. Meanwhile, the Pound is trading on a stronger footing against the majors this morning, after Mark Carney, the BoE Governor, indicated that there is no need for further easing, given the broad strength of the economic recovery. Market participants expect Britain’s economy to improve during the latter half of this year, in the light of recent upbeat macro indicators. Data released overnight indicated that GfK consumer confidence in the UK rose to the highest level in nearly six years, while a Nationwide report earlier today indicated a further pickup in house prices. However, there are growing concerns that stimulus in the UK is fuelling a bubble in house prices. Market participants will look across both sides of the Atlantic for further direction to Sterling in today’s session.

US Dollar – US Markets

The US Dollar strengthened against both the Euro and the Pound yesterday following encouraging initial jobless claims data which showed that the number of people filing for jobless benefits in the US unexpectedly fell for the previous week, thereby raising expectations of the Fed scaling back monetary stimulus in its October meeting. Against this backdrop, next week’s non-farm payrolls report will be keenly eyed for ascertaining the health of the labour market for September. Meanwhile, the second quarter GDP data came marginally below market expectations but matched previous estimates. However, rising mortgage rates led to a sharp fall in demand for previously owned homes in the US, further confounding traders over the state of the housing sector. Later in the session today, speeches by a few Fed officials will be closely watched for hints on the probable timing of withdrawing bond purchases. The final reading of Reuters/Michigan consumer confidence and personal spending data also feature on the US economic calendar today. However, most of the market attention is expected to revolve around news flows emanating from the US debt ceiling impasse and will influence market sentiment in the near term.

Euro – European Markets

The Euro was under pressure against the US Dollar yesterday weighed by uncertainty surrounding the Italian coalition government. The future of Italy’s ruling coalition hangs in the balance after Silvio Berlusconi's centre-right party threatened to pull out of the government, if their leader is ousted from the Parliament following his conviction for tax fraud. Against this backdrop, today’s Italian bond auctions will gain market attention for gauging market appetite for the country’s bonds. Additionally, strong US jobless claims data pressurised the Euro which slipped below the 1.35 mark against the greenback yesterday. In today’s trading session, the Euro has recovered from yesterday’s lows against the US Dollar ahead of the Euro zone sentiment indices later today which are expected to show an improvement for September. Additionally, the German consumer price inflation data will attract modest market attention followed by important macro releases from across the Atlantic later today. Also, Mario Draghi’s speech will be closely followed for deciphering the ECB’s future policy move, especially in the aftermath of recent comments from various ECB officials supporting further stimulus to support the economy, if needed.

Other Currencies – Highlights

The Yen has strengthened against the majors this morning, as concerns of another US debt ceiling showdown has made markets jittery and underpinned demand for the safe haven Japanese Yen. Moreover, uncertainty about the future course of the Fed’s asset purchases programme resulted in investors taking shelter in the Japanese Yen. On the macro front, data earlier today showed that Japan’s core consumer prices rose to the highest level in almost five years, cementing market hopes that the nation is treading the path to achieve the 2% inflation target. However, the rise was largely due to rising gasoline prices which in turn boosted food prices and may not translate into higher consumer confidence. Consequently, a host of domestic economic releases next week, especially manufacturing and industrial output will be carefully monitored for gauging the effectiveness of Shinzo Abe’s ultra loose monetary policy. Moreover, the Bank of Japan’s monetary policy meeting next Friday will be tapped for further guidance.