Evidence of corrective activity became clear across many currency pairs at the start of the European session in reaction to strong moves registered last week and in Asia overnight. Cable is off its lowest levels and EUR/GBP has steered away from breaking above the 0.93 level. Even so, sterling is far from out of the woods. Germany's weekend election looks set to out a pro-business CDU/CSU coalition in power with Merkel at the helm. The positive implications for the Dax, however, were countered by the negative pressure stemming from overnight losses in equities indices. Persistent concerns about the strength of the global economic recovery have also pushed EUR/USD lower, the release of weak German CPI numbers this morning were also EUR negative. That said, the EUR and the Dax are shaking off some of its losses at the US open nears. The JPY has reversed some of its aggressive overnight gains.
The technical outlook for sterling is still very negative, though over-extended momentum signalled potential for some corrective activity this morning. A report in the Times over the weekend citing BoE sources as saying that comments from BoE Governor King last week were misinterpreted by the market and remarks from Chancellor Darling that the UK government has no policy of deliberately weakening the pound suggest some remorse at the pace of recent fall in the pound. In the week ahead, further verbal support may be forthcoming. However, in view of reports that King is in meetings with the Riksbank, speculation that the Bank may follow the example of the Swedish central bank and lower the rate paid on commercial banks' reserves held by the BoE is set to weigh on the pound in the run up to the Oct MPC. After the Oct MPC is it possible that UK inflation may become a more discussed topic. BoE rhetoric on inflation has becoming less dovish with the minutes of the Sept MPC seeing lessened risk of a move by CPI below 1%. If sterling weakness persists it may reduce the risk of more QE in Nov.
Comment from Japanese Finance Minister Fujii that the yen's gains are not excessive caused a storm of yen buying overnight. Profit-taking ahead of and into the European open has lifted USD/JPY back to the 89.30 area but JPY buying ahead of the end of fiscal half year could still be forthcoming particularly if the market remains wary about 'risk' in general.
Risk aversion knocked the AUD and the NZD overnight too. The AUD remains relatively firmly positioned, however, on the back of its relatively solid economic performance this year and on the strength of its banking sector. EUR/CHF is bias higher in mind of concerns about possible intervention.
US data this afternoon is confined to the Dallas Fed manufacturing index.
