Risk appetite has been on clear view in most currency pairs this morning. The AUD, NZD and CAD have all fared better vs the USD and the JPY, cable has broken higher and EUR/GBP has blasted below key technical support at 0.8315. In tune with this mood stock indices are higher across the board this morning. Of note, however, is the EUR’s failure to make up much ground vs the USD.

EUR/USD has failed to hold above the USD1.3090 level this morning in whippy trade; strong selling pressure holding the EUR down. The inability of the EUR to push higher has facilitated the break lower in EUR/GBP and slackened the potential for EUR/JPY to push higher. While improved risk appetite is in evidence elsewhere, the reluctance of the EUR to push higher hints that investors remain wary about risk. This is in tune with widespread doubts about the momentum in the US economic recovery. Comments from former Fed President Greenspan warning that the US economy could be moving towards another double dip recession echo the sentiments of a paper written by Fed’s Bullard last week in which he warned that the Fed may have to considering re-opening the door to QE. Last week’s release of US G2 GDP failed to bring much clarity to the economic outlook. The data brought an upward revision in Q1 GDP but downward revisions to previous years which show that the US recession was deeper than had been thought. This week the market will be focused on the outcome of July payrolls data.

The release of Germany’s final July manufacturing PMI this morning confirmed the flash estimate at 61.2. The strength of the German recovery has become increasingly difficult to ignore and it will be interesting to see the response of ECB President Trichet to this following this week’s ECB’s August policy meeting. There is little chance of the ECB hiking interest rates until well into 2011. However, there is presently a contrast between the ongoing policy normalisation at the ECB and the Fed’s decision to leave the door open to further easing. Although the medium-term outlook for the EUR is still clouded by the possibility that Greece could be forced to re-structure its debt there is the possibility that the EUR could be squeezed higher near-term. Resistance is at USD1.3125.

Sterling’s move higher this morning can be traced back to the recent round of stronger than expected UK economic data. This morning’s release of manufacturing PMI showed a moderation in the pace of expansion from an upwardly revised June number. However, the expansion in July was better than expected and insofar as the market is expecting the pace of UK growth to moderate in H2 as austerity bites, today’s data settled a few nerves. The UK June industrial production data later in the week has the capacity to move the pound but the market will have to wait until the middle of the month to see if the better growth numbers have led to any significant improvement in the government’s budget. EUR/GBP has run into support near 0.8265.

The yen related rhetoric continued overnight with Vice Finance Minister Naoki Minezaki commenting that movements have not been abrupt. This should offset recent talk that the MoF may be on the brink of intervention, though we view these concerns to be overdone.

AUD/USD headed higher overnight on an improvement in risk appetite despite concerns that the Labour government could be losing some ground in its election campaign. Channel highs are at 0.9190.

This afternoon US ISM data are due.