Corrective activity was noticeable during the first part of the European session this morning. The weaker tone in stock markets in Asia overnight provided a reliable trigger for a move away from risk. However, the correction fizzled out mid-morning; the USD index is currently a little lower than last night's close and European stocks are a little higher. EUR/USD has spent most of the morning hovering just below the 1.4500 level.
A close above the 1.4510 area would strengthen the upside bias for the EUR as would another round of better than expected global economic data. However, the data calendar is light ahead of the publication of the Fed's Beige Book later today suggesting fresh incentives may be light this afternoon.
The release of the UK July trade deficit was worse than expected at –GBP2.4 bln for the balance in goods and services signalling that despite the weakness of the pound vs the EUR the UK is not seeing a substantial benefit on its external balances. Exports with EU countries rose by just GBP0.7 bln though this was above the GBP 0.4 bln rise in imports. Having corrected lower from the open in line with the early better tone of the USD, cable found support at the 1.6460 area and is presently positioned little changed from last night's close. The overnight release of the Nationwide consumer confidence data saw a rise to 63 in August from an upwardly revised 61 in July. This strengthens the view propagated by yesterday's better than expected July production data that the UK economy may lean towards growth in the present quarter. The Bank of England starts its two day meeting today. No change in policy is expected and, in view of the potential pitfalls still facing the economy, the BoE is likely to reiterate its cautious tone at tomorrow policy announcement.
The correction in the AUD has been a little larger than that seen in cable. Australian July retail sales at -1.0% m/m in July and the -2.0% m/m fall in July home loans both came as a disappointment and strengthened the view that RBA rates may remain on hold over the next couple of months.
Comments from the ECB's Noyer that stable currencies would help the global recovery may have been a reaction to the step up in price volatility yesterday. The ECB, like many central banks, have a long record of calling for fx stability. While some analysts do view the EUR as being overvalued, Noyer's comments are unlikely to translate into any policy action in the immediate future.
The Fed Beige Book is the key release today. Ahead of this, US mortgage applications and Canadian Housing starts data will be released.
