EUR/USD edged a little higher early in the European session in what has been a fairly directionless morning for the currency pair. This morning's USD/CNY fixing was flat from the previous close which adds to the view that any revaluation of the CNY this year will be moderate and implies that demands for clarity regarding China's exchange rate intentions may yet be heard at the forthcoming G-20 meeting.

For now it seems that Monday's rally in risk in response to Chinese exchange rate news was overdone. Following yesterday's fall in US housing starts and given concerns over European banks and a mixed set of Eurozone PMI and confidence indicators this morning the risk trade has suffered a setback, though the European stock indices have moved a touch higher after a weak open.

The Jun Eurozone composite PMI index registered 56.0, a little better than expected but down from May. German July GfK consumer confidence was unchanged from Jun while Italian consumer confidence was softer. While previous indicators have been sufficient to give a modest lift to market expectations with respect to Eurozone growth this year, these data are unlikely to extend optimism much further. Balancing the recent improvement of economic data are continued concerns with respect to the Eurozone market sector.

Comment from the Banque De France's Noyer yesterday that some banks have started to have funding problems along with the downgrade for BNP Paribas will have heightened fears that further bad news is to come; the market is still most sensitive to fears over the prospect of bad loans in the Spanish banking sector. Spanish officials are continuing in their attempts to win back market confidence with the PM this morning reassuring the market that sovereign bond yields were still at low levels and the Finance Minister stating that Spain will have no problem in financing redemptions.

Results of recent Spanish auctions have been at the better end of market expectations but the market continues to speculate that support may have come from the ECB. Similarly while this morning's Portuguese 2015 bond sale went well (EUR943 mln 2015 bonds were sold at a bid/cover of 1.8), markets remain relatively anxious; the EUR failing to find support on this news.

Sterling rallied this morning on the news that one member of the MPC has voted in favour of a rate hike this month. Sentance's dissenting voice is not a complete surprise, his views are well known. However, his calls for a rate hike adds weigh to more general concerns that inflation has been persistently more resilient that BoE expectations for much of the last year. Fears that next Jan's VAT hike will add to the inflation rate can only further these fears.

That said BoE Governor King is of the view that excess capacity weigh bear down on inflation potential. In the wake of yesterday austerity budget, it seems likely that the majority of the MPC will steer away for calling for policy tightening at least until further assessments of the impact of the budget have been made. The debate as to whether the budget will knock the economy back into recession continues to rage, though for now it is too early to know how precisely how big a risk this is. Given that the Chancellor's forecasts on reducing the budget deficit and the structural deficit are likely to fend off any threat of a credit rating downgrade, sterling has endorsed the tone of the budget. Technically the outlook for EUR/GBP is also bearish. The break of 0.8260 suggests potential back towards the 2010 low at 0.8210.

Decent NZ current account data have helped lend some support to the NZD, although comments from Finance Minister English that it is likely to get 'significantly' worse offset will offset optimism. As stocks started to claw back opening losses, both the NZD and AUD have edged higher in European hours.

Canadian retail sales, US home sales data and the FOMC decision are due today.

Jane Foley

Research Director +44 207 398 5024   FOREX and other leveraged products involve significant risk of loss and may not be suitable for everyone. is a trading name of GAIN Capital - UK Limited and is authorised and regulated by the Financial Services Authority (FSA FRN 190864)

The information and opinions in this report are for general information only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. This report has been issued by GAIN Capital - UK Limited (, authorised and regulated by the Financial Services Authority.