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The British pound saw choppy price action throughout overnight trading as markets were relatively quiet ahead of the U.S. non-farm payroll report, but has begun to get heavy as we approach the release. Sterling saw early weakness despite the Nationwide Building Society reporting house prices rose for a fifth month by 0.9% surpassing estimates of 0.7%.


Talking Points
• JPY: Supported At 89.25
• GBP: Choppy As Rising Home Prices Fail To Support
• Euro: Range Bound Despite Hawkish ECB Talk
• USD: U.S. Non-Farm Payrolls on Tap

Pound Choppy, Euro Subdued Ahead Of U.S. Non-Farm Payrolls

The British pound saw choppy price action throughout overnight trading as markets were relatively quiet ahead of the U.S. non-farm payroll report but has begun to get heavy as we approach the release. Sterling saw early weakness despite the Nationwide Building Society reporting house prices rose for a fifth month by 0.9% surpassing estimates of 0.7%. Despite increasing values Britons still saw fit to inject 7.0 billion into home equity which is evidence that consumer are continuing to retrench. Meanwhile, the construction PMI reading unexpectedly fell to 46.7 from 47.7 adding to concerns that growth will flatten once government stimulus abates.

The prevailing concern is that consumer consumption will remain weak as long as the labor market has trouble finding its footing. The fact that Britons prefer to save money and invest in their homes rather than fund vacations and purchases of durable goods such as cars and appliances will limit the scope of the recovery. The BoE continues to express concerns over the difficulty for consumer and small businesses to obtain credit because of the implications for domestic growth. Therefore, the possibility of more quantitative easing is alive and may continue to weigh in the pound. Support is ahead at 1.5701-38.2% Fibo of 135.10-1.7045 but we could ultimately see a test of the 200-Day SMA at 1.5434.

The Euro traded in a narrow 40 pip range despite hawkish talk from the ECB and a rise in producer prices of 0.4% in August. The central bank has started to urge the European Union to start withdrawing fiscal stimulus by 2011 at the least. Although the target date is over a year away we may start to see it impact interest rate expectations which could become a supportive factor for the single currency. The potential of rising inflation will start o become a concern for policy makers as they try to adhere to their mandate for price stability. Energy cost rising 1.5% led to the higher costs for manufacturers and may start to filter throughout the rest of the economy. Nevertheless, producer prices were down 7.4% from a year ago which has allowed the central bank to keep rates on hold as they are currently deemed appropriate for the current growth and inflation environment. Today the prevailing pessimism over the global recovery may continue to weigh on the Euro unless we see a surprisingly strong U.S. labor report.

The dollar has continued to find support especially against high yielders like the Australian dollar as concerns have grown that today's Non-farm payroll report may disappoint. Economists are expecting the economy lost 187,000 jobs which rose from earlier forecasts of 175,000. Early indicators have fueled the pessimistic outlook as initial jobless claims and ADP private employment report both missed estimates showing a weaker than expected labor market. If this is the case today then we may see greenback support continue on safe haven flows. Conversely, a stronger than expected print may reignite risk appetite and fuel demand for riskier pairs. Traders must also beware of the potential for dollar strength on a strong report as we have seen in recent releases as it could raise interest rate expectations for the U.S.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com