With the threat of deflation in Euro zone looming large, the outcome of today’s ECB policy meeting and the post-meeting press conference hosted by the ECB Chief would prove pivotal in determining the direction for currency markets. Given the ECB Chief, Mario Draghi’s uncanny ability to regularly surprise market participants with his unconventional views, it remains to be seen if he follows suit during the course of today’s trading session. However, the BoE is likely to adopt a wait and see approach at it's policy meeting today. With recent poll surveys showing interesting findings, Sterling investors remain wary ahead of the Scottish independence vote.
Across the Atlantic, the ADP jobs report scheduled today is likely to confirm improvement in the US employment market.
Pound Sterling – UK Markets
In the wake of mixed comments from the BoE Governor last month and after two policymakers dissented at the last policy meeting, the outcome of today’s policy meeting holds significance. However, the central bank is expected to keep its key interest rate and asset purchases facility unchanged at current levels. Additionally, a string of macro data in the US will be keenly eyed, considering its potential to alter risk sentiment going forward following recent upbeat US economic data.
Yesterday, data indicated that activity in the UK’s dominant services sector expanded at its fastest pace in almost a year, in line with this week’s upbeat construction PMI data. This has raised expectations that recovery in Britain might remain strong during the third quarter. However, the Pound continued to trade lower against the majors yesterday after a poll survey released earlier this week showed increased support for Scottish independence. Additionally, Russia and Ukraine moved closer to a ceasefire agreement in Eastern Europe, adding further pressure on Sterling against the Euro.
US Dollar – US Markets
The greenback is range bound against the majors this morning ahead of the release of ADP employment numbers which is likely to show that more than 200K jobs were added for August. The release would provide an early insight into tomorrow’s official labour market report which is anticipated to show a drop in the nation’s unemployment rate. Investors will keep a close eye on the US labour market data, given its importance in determining the future course of the Fed’s monetary policy. Additionally, the ISM non-manufacturing PMI report scheduled later today might show that the pace of services sector activity slowed for August after improving unexpectedly for the previous month.
Yesterday, media reports of a ceasefire deal between Ukraine and Russia sparked some volatility in currency markets, although no concrete agreement has been reached yet. Separately, the US Fed’s Beige Book survey indicated that the US economy grew at a “moderate” pace across most of the Fed districts in recent weeks, providing minimal direction on whether the economy was decelerating or overheating. However, another report showed that US factory orders improved sharply for July.
Euro – European Markets
Data released earlier today indicated that growth in German factory orders rebounded sharply for July. This was in contrast to the recent surveys which suggested that Europe’s largest economy is heading towards a recession. Meanwhile, another report revealed that the unemployment rate in France increased for the second quarter. Markets have shown little reaction to today’s mixed economic data and the Euro remained in a tight range against the majors this morning. Today’s ECB policy meeting will attract significant market attention, especially considering last month’s dovish comments from the ECB Chief. It would be interesting to see whether the ECB unveils a fresh round of easing measures or simply lays the groundwork to act in the future.
The Euro remained range bound against the US Dollar yesterday. Downbeat Euro zone retail sales and services PMI data across most of the key European nations released yesterday showed that economic activity in the region remained weak. However, signs of Russia and Ukraine reaching a truce agreement limited the downside in the common currency against its major counterparts.
Other Currencies – Highlights
The Canadian Dollar gained ground against the greenback yesterday following the Bank of Canada’s latest monetary policy statement which was interpreted as hawkish by markets. The central bank indicated that exports surged during the second quarter which could translate into higher business investments and an improvement in the hiring pace. The statement further indicated that imbalances in the nation’s housing market were not seen diminishing anytime soon, but the central bank might have to tighten its monetary policy stance if imbalances go beyond the tolerance zone. Meanwhile, the central bank maintained its key interest rate unchanged at 1%, in line with market expectations.
With little on the domestic macroeconomic front, the Canadian Dollar is expected to take further direction from tomorrow’s official labour market reports in Canada and the US. Additionally, an improvement in risk appetite amid hopes of a ceasefire agreement between Russia and Ukraine is anticipated to keep the Canadian Dollar supported against the US Dollar.
Dollar Weakens as Fed Rate Cut in July Seems Imminent