BoE Keeps Monetary Policy Stance Unchanged

Yesterday, the BoE left its policy stance unchanged at current levels, in line with market expectations. The wait and watch approach adopted by the central bank seems sensible, considering today’s weak UK trade data. However, with rising expectations for a sooner than expected hike in interest rates, market attention has now shifted to next week’s inflation report and the minutes of yesterday’s policy meeting scheduled later this month, to gauge the view among policymakers. The ECB also followed suit by keeping its policy stance unchanged and today’s encouraging German and French economic data would provide some relief to policymakers. Meanwhile, investors will monitor developments in the Middle East after the US President authorised its military to initiate air strikes in Iraq.

Pound Sterling – UK Markets

The Pound continued to trade lower against the US Dollar yesterday. Along expected lines, the BoE, in its monetary policy meeting, left its key interest rate unchanged at 0.5% and maintained its asset purchase facility steady at £375 billion. With no cues over the exact timing for interest rate hikes, market attention has now shifted to next week’s inflation report and the minutes of yesterday’s meeting due later this month for further direction. Additionally, upbeat US initial jobless claims data for last week further strengthened views that the labour market continues to recover at a steady pace in the world’s largest economy. The Pound is trading lower against the Euro this morning following positive macro data in Germany and France. Additionally, data just out indicated that the trade deficit in the UK widened for June. The impact of recent weak domestic macro data on the revised GDP numbers scheduled next week cannot be ruled out. Additionally, in the forthcoming week, markets will keep a close watch on the domestic labour market report to gauge the amount of slack in the sector and to ascertain whether wage growth continues to remain subdued.

US Dollar – US Markets

The US Dollar dropped against other safe haven currencies this morning after the US President, Barack Obama, authorised air strikes against militants in Iraq in order to protect American personnel. Additionally, a fresh round of encouraging economic data in Germany and France dented demand for the US Dollar against the Euro. Data released earlier today indicated that trade surplus in China widened unexpectedly for July, helped by a faster pace of rise in exports. In the upcoming week, a slew of macro data, especially retail sales and industrial output reports, will be keenly eyed to ascertain the pace of revival going forward. Additionally, speeches from some Fed officials will keep investors interested in order to assess their views over the policy outlook, mainly in the wake of mostly positive US macro data which has boosted hopes for a sooner than expected hike in interest rates. Yesterday, the US Dollar advanced against the Euro following dovish comments from the ECB Chief. Additionally, further signs of improving US labour market conditions emerged after data indicated that the US initial jobless claims data dropped unexpectedly last week.

Euro – European Markets

The Euro is trading higher against the majors this morning following encouraging macro data in Germany and France. Data showed that German exports rose more than expected for June, although higher imports resulted in a narrower trade surplus. Additionally, French industrial output recovered at a faster than anticipated pace for June. Meanwhile, the ECB Chief, Mario Draghi, indicated yesterday that the weak value of the Euro could give an additional boost to the region’s exports and assist domestic recovery. He further indicated that geopolitical tensions in Ukraine could adversely impact the region’s growth outlook and the central bank officials stand ready to take further action, if required. The dovish comments from the ECB Chief along with upbeat US initial jobless claims report led the Euro to move lower against the greenback yesterday. Meanwhile, the ECB kept its key interest rate unchanged at 0.15%. With no major economic releases scheduled across Europe and the US today, markets will continue to track events unfolding in Ukraine and the Middle East for further direction to risk appetite.

Other Currencies – Highlights

The Japanese Yen gained ground against the greenback this morning amid higher demand for safe haven assets after the US President, Barack Obama, authorised air strikes against the ISIS militants in Iraq. Gains in the Japanese Yen were extended further after data released overnight showed that Japan’s trade deficit narrowed more than expected for June. Separately, the latest Bank of Japan’s monetary policy statement revealed that officials unanimously voted in favour of continuing the ultra-loose monetary stimulus programme and indicated that weakness in the nation’s export and industrial output was in sight. Meanwhile, in a noteworthy development, Japan’s public pension fund disclosed plans to pour more funds into the domestic stock market. With little on the domestic macro front today, markets await next week’s domestic consumer confidence report for July to verify the central bank’s claims that household spending could improve as the impact of the previous sales tax hike recedes. Additionally, second quarter GDP report and industrial production data in Japan will keep market participants interested.