After a fairly timid end to last week’s session on Friday this week is tipped to prove pivotal for global risk trends in August. With a variety of significant US economic indicators set for release alongside a speech from the Federal Reserve it is possible that the Fed taper debate could once more dominate forex markets.
With US Consumer Sentiment striking a 6-year high of 85.1 during July it is likely that US Consumer Confidence will print positively on Tuesday afternoon, which could pave the way for a stronger US Dollar. On Wednesday US ADP Employment is predicted to print at 180,000, which is a fairly average score and is unlikely to yield much market movement. However, later on in the day US second quarter growth is forecast to come in at 1.0% and the Chicago Manufacturing PMI is expected to improve from 51.6 to an impressive 54.0. These figures are broadly inline with the Federal Reserve’s economic projections, but a stronger Q2 GDP print could tempt the US Central Bank into reducing its $85 billion a month stimulus scheme sooner rather than later.
On Wednesday evening the Fed will announce whether it intends to taper asset purchases during August. It is most likely that Chairman Ben Bernanke will opt to continue with the current pace of quantitative easing but any hints that tapering is around the corner could derail global risk sentiment.
Thursday sees the Bank of England take centre stage as Chairman Mark Carney shows his true monetary policy colours. The benchmark interest rate is almost certainly going to remain at the current record low of 0.50% and the asset purchasing target is fairly likely to remain unchanged at £375 billion. However, it is possible that the BoE will act now to give QE one last boost in the hope that it improves economic conditions in Britain and helps the UK reach exit velocity. With inflation running above target but projected to fall throughout the second half of the year it is possible that members of the Monetary Policy Committee will commit to further stimulus at this juncture in order to help alleviate unwanted pressures on UK gilts when the Federal Reserve eventually announces a slowdown of QE3.
If the BoE does in fact bolster its asset purchasing programme then the Pound is likely to come under serious pressure on the currency markets as traders mull over the prospect of reduced profitability from Sterling holdings.
Also due on Thursday: US Manufacturing is predicted to come in at a fairly robust 52.0 for July but British factory output is expected to outpace its American counterpart with a score of 52.8, which could lend the Pound a hand if the BoE holds off on monetary loosening.
On Friday the US Unemployment Rate is tipped to fall from 7.6% to 7.5% as the hugely influential US Non-farm Payrolls report prints at 185,000. A score in this region is likely to prove neutral for risk appetite as it will not be considered strong enough to bring about a slowdown of Fed asset purchases nor will it be deemed weak enough to cause investors to scale back their tapering bets.
Essentially the week boils down to two major questions: “will the Fed taper?” and “will the BoE loosen?” The Bank of England announcement is likely to have a large impact on the Sterling crosses, but is not likely to affect global themes of risk appetite. However, the Fed taper debate could have a profound affect on the forex market. A slowdown, or hints of a slowdown, in Fed asset purchases would most likely send the US Dollar soaring against Sterling but weaken the risk-correlated Euro, New Zealand Dollar, Australian Dollar and Canadian Dollar against the Pound.
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