Stronger US economic data yesterday served as a reminder that whilst the pace of the US recovery has clearly moderated it remains on an expansionary trajectory. It is by no means a foregone conclusion that the Federal Reserve will resort to further monetary policy easing and in the absence of a shockingly poor payrolls report tomorrow, it is likely that the Fed will not act on August 10.

The USD was able to claw back additional ground vs the EUR early in the London session with the gains extending to the 1.3120/25 area this morning. A bounce ensued with the EUR recovering back above 1.3200. Tomorrow's payrolls data is now a clear focus for the market. Following yesterday's fairly aggressive position adjustment some consolidation ahead of this release is possible though speculation that Trichet may confirm that the ECB will continue to withdraw special liquidity provisions is giving the EUR a lift into the ECB's press conference this afternoon.

Last week the bond purchases of the ECB dropped to just EUR 81 mln. The lack of activity in this program over the past couple of weeks indicates that this support is being drawn to a close. There is little chance that the ECB will hike interest rates before the middle of next year but it seems increasingly likely that the ECB will continue to phase out extra liquidity measures introduced as a result of the financial crisis.

This morning release of better than expected German Jun factory order at 3.2% m/m follows recent strength in Germany's IFO survey and declines in unemployment and should heighten the confidence of the ECB. Any confirmation from ECB President Trichet at this afternoon's press conference that the ECB will hasten the pace of policy 'normalisation' could create an additional flurry of EUR buying this afternoon. However, it is likely that USD buyers will contain the upside for EUR/USD at least until the outcome of tomorrow payrolls report is know. Immediate technical resistance is at EUR/USD1.3230.

Today's BoE policy meeting is expected to pass without event although it is possible that Sentance will again vote for a rate hike. While the Bank has left the door open for more QE, inflation has not moderated sufficiently for further QE to be announced. In any case the better than expected performance of the UK economy in Q2 has relieved some of the pressure for the Bank to act again soon. The release of the Quarterly Inflation Report next week will be keenly watched.

The early softer tone of cable this morning has been reversed following the recovery of EUR/USD. EUR/GBP has ticked higher on the better tone of the EUR, however the old key 0.8315 key technical support is presently offering decent resistance. EUR/CHF has pushed lower towards the 1.6600 area.

The CAD has been bid this morning following talk of potential M&A activity. The CAD has outperformed both the AUD and the NZD. Soft NZ labour market data overnight drove home last week's warnings from the RBNZ that the trajectory of rate hikes would be moderate going forward. The NZ unemployment rate rose to 6.8% in Q2 from 6.2% in Q1 despite a slight fall in the participation rate.

US Initial claims this afternoon will whet the appetite further ahead of tomorrow's payrolls release but the ECB press conference is the real focus today.

Jane Foley

Research Director
+44 207 398 5024