British Inflation Continues to Ease

Data just out indicated that consumer price inflation in the UK eased for August, in line with expectations, thereby giving some relief to BoE policymakers to keep their policy measures intact. Against the backdrop of slowing inflation, tomorrow’s domestic labour market report will be keenly eyed, considering its importance in deciding the future course of monetary policy. Additionally, any updates related to this week’s Scottish referendum will keep investors interested. Across Europe, today’s German ZEW sentiment survey will keep market participants on their toes, especially after the OECD lowered its 2014 growth forecast on the region’s largest economy. In the US, traders will continue to scrutinise upcoming economic releases following yesterday’s weak industrial production data.

Pound Sterling – UK Markets

Along expected lines, data just released indicated that consumer price inflation in the UK eased further for August and continued to remain below the central bank’s 2% target, thus providing some room to BoE policymakers to keep policy measures accommodative for some more time. However, the reaction in the Pound remained muted and it continued to trade lower against the majors this morning amid uncertainty surrounding this week’s Scottish referendum outcome. Additionally, data released by ONS showed that UK house prices rose more than expected for August. However, Sterling, at this point of time, seems to be impacted more from news flows surrounding the Scottish referendum opinion polls rather than the domestic economic data. The trend is likely to continue until 18 September 2014 when the actual voting on the referendum takes place. In yesterday’s trading session, losses in Sterling against the US Dollar were capped following disappointing US industrial production data which pointed towards some weakness in the nation’s manufacturing sector.

US Dollar – US Markets

The greenback dropped against the Euro yesterday following the release of downbeat US industrial production report for August. Data showed an unexpected drop in industrial output and lower capacity utilisation in the manufacturing sector, thereby stoking concerns about a potential slowdown in the pace of domestic activity for the third quarter. This was in contrast to the recent ISM manufacturing survey which showed that the manufacturing activity expanded further for August. Additionally, the OECD cut down growth forecasts on the US from 2.6% and 2.1%. With little on the domestic economic calendar today, tomorrow’s US inflation reading will be watched closely. This is likely to confirm that August was a month with lacklustre performance, especially with signs of softening US labour market. However, most of market attention will remain focused on tomorrow’s US Fed policy meeting outcome where the central bank is expected to taper its asset purchase programme by another $10 billion. Traders will also keep a tab on the post-meeting statement for any hints about the timing of an interest rate hike, particularly considering mixed comments from various Fed officials.

Euro – European Markets

The Euro is trading in a tight range against the majors this morning ahead of the release of September’s ZEW survey which is likely to show a deterioration in investors’ morale for a ninth straight month in Germany. The expected weakness could be attributed to the persistent weak German inflation along with the prospects of a deeper macro trouble for Europe’s largest economy after the EU imposed new sanctions on Russia. A similar data is expected from the Euro zone later in the day. However, an upside surprise in the ZEW survey cannot be ruled out, considering the recent stimulus measures introduced by the ECB to boost recovery in the Euro bloc. In a noteworthy event today, the French government faces a parliamentary confidence vote. The Euro lost ground against the majors yesterday following the release of trade balance data in the Euro zone. Data showed that the region’s seasonally adjusted trade surplus narrowed unexpectedly for July, due to a drop in exports after Russia banned imports from the EU. Additionally, the OECD cut its economic growth forecast on the Euro zone to 0.8% from a 1.2% growth projected earlier.

Other Currencies – Highlights

The Japanese Yen failed to register gains against the greenback in yesterday’s trading session despite data showing an unexpected drop in US industrial production for August. The downside in the Japanese Yen against the majors was limited this morning following comments from the Bank of Japan Governor, Haruhiko Kuroda. The BoJ Chief indicated that inflation target is reaching close to the central bank’s 2% target and conditions in domestic spending and labour market are expected to improve as the impact of April sales tax hike was seen fading away. However, he reiterated that prospects of further monetary easing cannot be ruled out, especially if inflation faces any problem in reaching its target rate. Going forward, the US Dollar-Japanese Yen pair is expected to witness some volatility ahead of US consumer price inflation numbers and the Fed policy meeting scheduled tomorrow. Additionally, Japan’s trade data due later this week is anticipated to show a wider deficit for August in the wake of stressed global geopolitical conditions and weak demand from emerging economies.