Geo-political Threats Influence Markets

There remains a sense of unease among market participants, as flare up in tensions in the Middle East and Eastern Europe further exposed the fragility of political environment across the globe. Although build up to the FOMC meeting is likely to have a profound influence on today’s trading session, a flight to safety cannot be ruled out given the steadily rising threat of political instability. With today’s data showing slower CPI growth for May, the Pound could once again retest yesterday’s highs, given rising chance of a sooner-than-expected interest rate hike in the UK. Meanwhile, the results of today’s ZEW survey in Germany will offer a glimpse of the overall reaction to ECB’s recently adopted loose measures.

Pound Sterling – UK Markets

The Pound edged lower against the majors in today’s trading session after data just released revealed that consumer price inflation in the nation eased more than expected for May. The persistent easing trend in UK consumer prices over the past few months is likely to weight on the last week’s comments from the BoE Governor, wherein he indicated that the central bank might soon hike interest rates. In the wake of continued increase in the UK house prices, the Financial Policy Committee is widely expected to announce some measures today to control the overheating UK housing market, as previous measures seems to have limited impact. Additionally, markets will keep a close watch on tomorrow’s minutes from the BoE latest monetary policy meeting for policymakers views over the spare capacity in the nation and probable timing of interest rate hikes. Yesterday, the Pound briefly moved above 1.70 mark against the greenback buoyed by hawkish comments from the BoE policymakers. The BoE member, David Miles, reiterated last week’s hawkish comments by the BoE Governor, stating that the central bank might raise its benchmark interest rate soon, on the back of steady pace of recovery in the domestic economy. He further opined that the weak UK inflation might not be a sufficient reason to delay the rate hike.

US Dollar – US Markets

The Fed embarks on the two day monetary policy meeting later today. It is widely believed that the central bank is unlikely to upset the applecart and is likely to stay on course to extinguish its asset purchases by the end of this year. However, focus remains on the Fed Chief, Janet Yellen, for hints on the possible timing of interest rate hikes in the US. The IMF lowered its US growth forecast for the current year and cautioned that the US economy is unlikely to see full employment until the end of 2017. With the IMF building a strong case in favour of maintaining lower interest rates for a longer period, the greenback weakened against its peers in yesterday’s session. Meanwhile, losses were limited on account of better than expected industrial production data for May. Besides, the NAHB housing market index showed a sharp jump for the current month. Against this backdrop, market participants will eye today’s crucial housing sector data in order to monitor if the housing starts remained above the one million mark for the second consecutive month. Meanwhile, the US consumer prices for May is expected to remain stable.

Euro – European Markets

The common currency advanced against its major peers in yesterday’s trading session but gains were limited following ongoing geopolitical tensions in Iraq. Data released earlier confirmed that Euro zone inflation eased for May, however, reaction to these figures were fairly muted, as attention has now shifted to forthcoming releases to gauge the impact of accommodative measures announced by the ECB earlier this month. This is likely to be evident through today’s Euro zone and German ZEW surveys which are likely to show an improvement in sentiments. Additionally, the IMF slashed its US economic growth projections for 2014, which lent support to the Euro. Meanwhile, the Euro is range bound against its major peers this morning. Apart from ZEW surveys, today’s economic releases from the US will be keenly eyed which could have a bearing on the market sentiment going forward. Meanwhile, tensions in Eastern Europe seems to have re-emerged after Russia cut off gas supplies to Ukraine in a dispute over unpaid bills.

Other Currencies – Highlights

The Aussie Dollar is trading on a weaker footing against the greenback this morning as the minutes of the Reserve Bank of Australia’s latest monetary policy meeting adopted a dovish view over the domestic economy. Further, the minutes reassured that the central bank would maintain its current accommodative policy stance for foreseeable future as it is helping the economy, although it is unclear whether this might offset the effects of the tough federal budget and expected declines in mining investment. Meanwhile, yesterday, the RBA Assistant Governor, Christopher Kent, opined that the unemployment rate in Australia is likely to remain relatively high for the next two years, stating that there remains a fair degree of spare capacity in the domestic labour market despite the recent improvement. Against this backdrop, today’s comments from the RBA Governor, Glenn Stevens for his views over the current policy stance will keep investors on their toes.