A modest bias away from risk was evident in European hours this morning ahead of this afternoon's US payrolls report and following the cautious mood on the economy reinforced by the Bank of England's policy decision yesterday. Stock market are lower across the board, the JPY is higher. Cable has edged quietly lower ending an exciting week on a dull note. The pound is also softer vs the EUR and the JPY.
The release of the UK PPI data had little impact on sterling this morning. In general inflation has been trending lower. However, PPI output rose +0.5% m/m, five times greater than expected from an upwardly revised Jun figure. On its own this figure is not significant. However, just a month ago the 'sticky' CPI data was being widely touted as a potential reason why the Bank may not extend its QE program. Now that the Bank has increased QE by a surprisingly large GBP 50 bln it follows that inflation may return to the UK economy earlier than expected, a factor which will bleed into BoE policy expectations and should be sterling supportive on a 3 to 6 mth view.
his morning cable retained a softer bias though may be finding a base above the 1.6700 level. EUR/GBP has been trending higher towards the 0.8600 level.
German data were more exceptional this morning. Jun exports rose 7.0% m/m. This gives credence to the recent higher factory orders data and the improvements in the IFO survey.
ogether these data underpin the comments from the ECB's Trichet yesterday which suggested that the Eurozone economy could start expanding earlier than the middle of next year as previously expected. EUR/USD has ticked modestly higher this morning helped by the data; the move is counter to the trend in the market this morning which has been favouring risk aversion trades.
The modest move higher in the NZD vs the USD this morning is also counter to this morning risk aversion bias. Support came from a survey showing an increase in optimism with respect to the domestic housing market. NZD/USD is still shy of its recent high around 0.6760 which is likely to offer resistance.
US payrolls data will set the tone for the reminder of the week. The market is looking for further signs that the recession has reached a floor. The market median points to a drop in payrolls of 325K in July. Unemployment is expected to climb to 8.8%. Canadian Jul employment is expected to drop by 15K.
