Unsurprisingly EUR/USD has traded sideways ahead of the payrolls data. Given that there is sufficient bearish market rhetoric at present to make it seem as if there is a real risk that the US economy is at risk of tipping back into recession, the most crucial aspect of today's data is whether it raises the possibility of a relaunch of QE2 from the Fed, potentially as soon as Aug 10. To this end the private payrolls aspect of the report should be watched closely. Private payrolls will remove the huge impact of census hiring and should be a decent litmus test to health in the underlying economy.

Whilst often erratic, private payrolls have been on an improving trend since spring 2009 and have averaged growth of 99K this year. The market is expecting private payrolls to print +90K for July. Insofar as payrolls, production and retail sales remain on an improving (albeit moderating) trend, we would argue that there is currently little chance of further QE next week. To this end private payrolls will have to be fairly close to zero to significantly increase the risk of more Fed stimulus.

Barring any huge negative shock in payrolls, the market is likely to be disappointed by the Fed on Aug 10, insofar the weight of US economy data is suggesting that the economy is still expanding and there is consequently still little chance of further easing. This view implies that risk appetite may be pared back next week. The CAD was a strong performer yesterday on talk of MA. Today the CAD has reversed some of these gains vs the USD, though USD/CAD remains below the 1.0780 resistance. AUD/USD failed again to push above the 0.9180 level overnight following the indication from the RBA that rates were likely to remain on hold for the next few months at least.

The RBA also downplayed fears that Australian banks were on the brink of raising lending rates fairly aggressively. The RBA commented that overall funding costs for the banks would increase only modestly and should be accounted for by a small rise in lending rates for businesses. Given steady rates at the RBA, the approaching election and the moderation in growth in China and in the US, AUD/USD may struggle to extend gains much further. Following 0.9180, stronger resistance lies nr 0.9400.

Weaker than expected UK June industrial production (-0.5% m/m) knocked sterling lower this morning. Oil and gas extraction accounted for a large part of the decrease. The manufacturing index fared better, though at +0.3% m/m this was still weaker than expected and provided no respite for the pound. Given sterling's recent appreciation, the pound will be more sensitive to weaker data going into Q3. That said the better UK growth recorded in Q2 should have a positive impact on the monthly budget data due in the middle of the month. If so sterling could be propelled higher. Ahead of that the Inflation Report next week is a prime focus for the market. Although the Bank usually talks down medium-term inflationary pressures, it may be forced to revise higher its medium-term inflation forecasts. This could also support the pound.

News that S&P has withdrawn its AAA/A-1+ rating on the SNB caused a spike higher in EUR/CHF this morning. The impact was short-lived; it soon became clear that the decision by the S&P was influenced by the fact that there is a lack of interest in its rating on the SNB due to the latter having no rated debt.

Canadian labour data in addition to US are due today.

Jane Foley

Research Director
+44 207 398 5024