The EUR was hit hard early in the European session on a wire report that EU Monetary Affairs Commissioner Almunia said that the Eurogroup will discuss the appreciation of the EUR ahead of this weekend's G7 meeting. Generally, G7 communiques bring little reference to fx markets except to stress there is a preference for stability. However, ECB President Trichet recently re-endorsed his support for the US Treasury's strong USD policy and this is stirring fears that Eurozone leaders are concerned as to the possible detrimental impact of EUR strength on the Eurozone recovery particularly given the very benign nature of European inflation (CPI stands at -0.2% y/y).
Following its initial sell off the EUR found buyers at the 1.4560 area. The upward revision to the IMF forecast for global growth next year and further signs of improvement in Japan's Tankan survey overnight fed confidence that the recovery remains on track. German retail sales data this morning were a disappointment (-1.5% m/m) but Eurozone PMIs generally pushed higher. The recovery in the EUR was dented, however, as risk appetite slipped along with the stock market.
The UK Sep manufacturing PMI data came in lower than expected at 49.5. This suggests that the recovery in the sector may be slipping which has dented the optimism triggered by this week's better consumer confidence number and the CBI retail survey. Included in the PMI was a drop in the new orders balance which will particularly undermine hopes that the economy can return to growth by year end. In contrast the BoE's lending survey provided better news suggesting that lenders intend to increase the availability of both mortgages and business credit over the next quarter. In tune with the recent falls in money market rates and yesterday's lower than expected demand for funds at the ECB' s 12 mth tender, this survey suggests the banking sector is returning to health. That said, the IMF continues to point to potential pitfalls.
In its Global Stability Report the IMF has warned that the UK is the country most susceptible to a shortage of credit derailing the economic recovery. After a choppy morning cable has pushed back above the USD1.600 level, though it has yet failed to shrug off its bearish technical picture. EUR/GBP has pushed down to the 0.9100 level on the back of the more bearish tone of the EUR.
EUR/CHF continues to head higher after the SNB yesterday put the frighteners on the market. Strength in the Swiss PMI lent the CHF some support, but intervention fear is dominating.
AUD/USD is steering away from 0.8850 resistance but remains supported by Australia's relatively strong growth and interest rate outlook and by its robust banking sector.
This afternoon a slew of US data will likely be dominated by the ISM number. Personal income and spending figures, initial claims and pending home sales will also be released.
