Scotland Independence Vote in Spotlight

Scotland has been the most talked country across the globe in recent weeks and tomorrow’s referendum outcome could prove crucial for the medium term outlook of Sterling. It would be too close to take on call on the probable result, as recent poll surveys revealed that both the campaigns were running neck to neck, although showing a narrow lead for the “No” campaign. The uncertainty surrounding the Scottish independence outcome has also overshadowed today’s broadly encouraging UK retail sales data. Although the US Fed reiterated that interest rates would remain near record low levels for a considerable time, it raised interest rate projections for 2015. Across Europe, markets will eye the results of the ECB’s first round of TLTRO auction scheduled today.

Pound Sterling – UK Markets

Data just released indicated that annual retail sales in the UK grew at a slower than expected pace for August, although it continued to support the notion that recovery remains encouraging during the third quarter. However, the reaction in the Pound was muted as investors preferred to remain on the sidelines ahead of today’s Scottish independence vote. With the pre-ballot poll surveys showing a close contest between both the “Yes” and “No” campaigns, tomorrow’s outcome could likely result in a nail biting finish and heighten volatility in the Pound against the majors. In case of a “Yes” vote, investors would assess the short term impact on both the economies, especially the UK economy which continues to show a steady recovery. The Pound advanced against the Euro yesterday after some poll surveys showed a slender lead for the “No” campaign. With the unemployment rate in the nation dropping to its lowest level since 2008 and wage growth showing an improvement, it might trigger a debate among BoE policymakers over the amount of slack remaining in the economy.

US Dollar – US Markets

The greenback gained ground against the majors in yesterday’s trading session following the outcome of the two-day policy meeting of the US Fed. The central bank announced a reduction to its bond purchase programme by another $10 billion and raised the median estimate for US interest rates at the end of 2015. Meanwhile, the central bank Chief, Janet Yellen, offered no hints over the timing of an interest rate hike and indicated that the Fed is likely to retain its current policy stance for a considerable time, as a slack continued to remain in the labour market. However, she stated that the nation’s headline inflation rate is expected to improve. This was in contrast with yesterday’s August inflation report which showed that consumer price inflation dropped for the first time since October 2013, mainly due to a decline in energy prices. The US Dollar is trading in a tight range against the majors this morning. Traders will keep a tab on a speech from the US Fed Chief later today for further hints on the thought process behind yesterday’s policy decision. Additionally, US housing and initial jobless claims data will provide further direction to the greenback.

Euro – European Markets

The Euro is trading in a tight range against the majors this morning before the ECB hands out results of the first round of its Targeted Long Term Refinancing Operations (TLTROs) auction today. The flagship tool has gained considerable market attention as it could help provide funds to smaller firms which are considered as the backbone of the region’s economy. The central bank is expected to extend its balance sheet by €150 billion in this round. Any lesser disbursement in loans through the TLTRO tool could heighten the prospects of additional stimulus measures to revive the Euro zone economy. Meanwhile, with little on the domestic macroeconomic front, the Euro is likely to take direction from today’s US housing starts and initial jobless claims data. The Euro lost ground against the greenback and slipped below the 1.29 mark following the US Fed’s monetary policy decision where the central bank reduced its bond purchase facility by another $10 billion. Additionally, the central bank raised the median estimate for US interest rates at the end of 2015. Meanwhile, the final consumer inflation reading in the Euro zone was better than expected for August.

Other Currencies – Highlights

The Kiwi Dollar lost ground against the greenback in yesterday’s trading session after the US Fed raised its median estimate for the federal funds rate at the end of 2015 to 1.375% from 1.125% projected earlier. However, losses in the Kiwi Dollar were capped this morning following the release of upbeat New Zealand GDP report released earlier today. Data showed that economic growth in the nation reached a multi-year high for the second quarter despite dairy and construction sector showing signs of a slowdown. Market sentiment towards the Kiwi Dollar remained supported as it strengthened prospects of the nation moving closer towards a more broad-based recovery. With no other domestic economic releases today, investors in the Kiwi Dollar will keep an eye on this weekend’s elections where opinion polls suggest a landslide victory for the current ruling National Party and allied centre-right parties.