Financial markets steadied in the European session amid hopes on central bank easing. As economic data recently released in the US showed signs of fatigue in the recovery path in the world's largest economy, speculations of QE3 intensified. This is likely the main reason for gold's recent rally. However, it remained doubtful whether further unconventional easing would have significant impact on the growth outlook. Worse still, stimulus would lift oil prices, dampening the growth trajectory.
The Fed's Vice Chairman Janet Yellen signaled weakness in the job market and vulnerability of financial conditions may call for the further easing. According to Yellen, scope remains for the FOMC to provide further policy accommodation...It may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest. The three conditions triggering for further actions from the central bank would be 1) if the outlook has little or no improvement in the labor market over the next few years; 2) sufficiently great downside risks to growth; or 3) inflation to fall notably below the 2% goal. Indeed, the worse-than-expected employment report due last week has raised hopes that the Fed would add further easing to bolster economic recovery.
Despite hopes that the QE3 would stimulate growth in the US, the positive impacts remain unknown and would possibly be less prominent than anticipated. Further easing from the Fed would send the US dollar lower. However, as the US economy is less dependent on exports but more on domestic consumption, depreciation in the US dollar might not help much. Meanwhile, the Fed's stimulus will improve risk appetite and hence, oil and commodity prices. Rebounds in commodity prices may eventually dampen the growth prospect.
As the EU sanctions of Iran oil exports would be in effect on July 1, oil prices would probably be sent higher. In order to offset the impact, it's likely that the US or the IEA would release strategic petroleum during the period.
On the dataflow, the US initial jobless claims probably fell -3K to 380K in the week ended June 2. The BOE would leave the Bank rate unchanged at 0.5% and the asset purchase program at 325B pound. The UK's services PMI unexpected stayed at 53.3 in May, compared with market forecast of a dip to 52.4.