US Dollar:
After a month of chop and questionable conviction behind investor confidence, Wednesday’s price action shouldn’t surprise too many active traders. General congestion with a restrained risk-aversion bias left the capi¬tal markets exposed to a sudden revival in confidence and that is exactly what we say for the day. The direction of the move isn’t so startling as the fact that correlations tightened across the various asset classes. Normally, a correction like this one doesn’t normally find such consistency but the reassurance provided by confirmation in other securities would certainly add to the strength of the move. From the simple barometers for risk appetite, we would see the S&P 500 rally 3 percent, US-based crude advance 2.8 percent and the benchmark 10-year Treasury not futures contract mark its second largest daily loss since June 10th. For the FX market, this would translate into the biggest drop for the US dollar since July 22nd and subsequent rally for those currencies that have been labelled fundamental pariahs or high yielders. The question for dollar traders now is whether today’s spark of optimism is permanent or fleeting.
DATA: Unemployment claims, Fed chair Bernankie testifies, Pending home sales
Pound:
Good thing for sterling bulls that risk appetite swept over the market. Otherwise, the pound would likely have extended its tumble against the US dollar with a round of discouraging news on and off the docket. For indica-tors, the manufacturing PMI dropped to a nine month low 54.3 reading to curb the enthusiasm surrounding the 2Q GDP performance. Then there was the CBI’s service sector health report which reported a distinct bearish outlook for profit. And, then there was the Time’s article for credit card debt write offs hitting a record high 2.1 billion pounds in 2Q.
DATA: Nationwide HPI.
Euro:
The monetary policy announcement from the European Central Bank may prove to be another non-event. The wide disparity in expected economic performance within the currency bloc over the coming years makes setting a single monetary policy difficult to say the least. While German growth is expected to outperform the regional average by over a percentage point on average through 2011, growth in relatively large member states like Italy and Spain is expect to underperform, making it all but impossible to set rates such as to both encourage growth and control inflation region-wide. Luckily for Jean-Claude Trichet and company, the ECB’s stated mandate is to ensure price stability. With the annual inflation rate at a manageable 1.6 percent below the 2 percent target level but not so low as to threaten deflation the temptation to adopt a wait-and-see approach by an already slow-moving ECB is surely overwhelming.
DATA: Minimum bid rate, ECB press conference.
General:
• The Aussie dollar’s reaction to its impressive second quarter GDP reading and the improvement in Chi¬nese manufacturing was initially bullish. However, as risk appetite solidified and the US joined the group for positive sentiment, the currency really ramped up. However, the heavy round of data has passed. Now the currency is fully dependent on sentiment trends.