European stock indices are struggling to hold onto opening gains. Last night’s strong performance of INTEL had boosted risk appetite, though this morning car makers and banks are providing a negative influence. The performance of fx markets this morning has also been mixed. EUR/USD has traded as high at 1.2737 this morning though it is presently trading under last night’s close. The yen is retaining a decent bid across the board. While this may be read as continued safe haven demand, it is likely being influenced by the approach of the 6 bln new share offering from Mizuho which could raise an estimated USD8.46 bln. AUD/USD has a good run on the upside this morning after a surge in consumer confidence data. However, a large part of these gains have been unwound as risk appetite has sagged along with the softer tone in stocks. Sterling has performed well on the back of a slightly better than expected set of UK labour data.

UK jobs data brought no great surprises, but all components of the data moved in the right direction. The headline claimant count data fell a slightly bigger than expected 20.8K between May and June, inactivity was down 0.2% q/q in the 3 mth to May, vacancies in the 3 mths to June were up 10K on the quarter, the unemployment rate was down 0.1% q/q in the 3 mths to May and the number of people in employment rose by 160K in the 3 mth to May. These data provide further signs that the UK economic recovery continued to gather pace during the second quarter. While this is encouraging it does little to dispel fears that the economy could weaken further in the second half of the year on the back of austerity. The overnight release of the June nationwide consumer confidence survey dropped 3 points in Jun and the possibility that confidence will fall again in July in reflection of the tightening in fiscal policy is high. While sterling may suffer if recessionary risks intensify latter this year, the pound remains around 21% weaker vs the EUR then its 2007 average suggesting that further sterling gains are possible vs the EUR given continued fears about bank solvency and sovereign default within the Euroarea. EUR/GBP is pushing lower towards the 0.8315 area this morning, close to yesterday’s lows. Further downside potential exists ahead of the publication of European bank stress next Friday.

AUD/USD surged overnight as consumer confidence data posted its biggest gains in 13 mths. The government’s updated fiscal outlook also confirmed a positive economic outlook. It was confirmed that the budget is expected to return to surplus in 2012-13 with the cash balanced revised up AUD4.9 bln between 2010/11 and 2013/14. The costing of the mining tax suggest that the new arrangements will subtract AUD7.5 bln from the budget. However, this will be offset by AUD6 bln due to higher commodity price forecasts. The biggest threat to this forecast in particular would be slower than expected world growth. Despite the AUD’s recent better tone vs the USD, it is still likely to struggle to regain this year’s highs near 0.94000 as long as doubts over the pace of growth in China and the US persist. Weaker than expected retail sales data weighed on the NZD overnight.

US retail sales this afternoon has the potential of offset any optimism drawn from corporate results. The economic forecast updates from the FOMC today will also be key.