Risk continued to be supported throughout the day, Syrian tensions although not subsiding appear to be favouring a diplomatic resolution with suggestion from Russia that Syria may agree to hand over their chemical weapons, although this may take several years in itself. That being said this was positive for risk which was supported by more fundamental drivers with strong Chinese data and an overall positive equity environment.
Yesterday was quiet on the data front and as such risk trends prevailed in the currency markets with JPY and USD facing selling, as the safe havens were sold off in search of higher yields, this obviously sent higher yielding currencies higher with AUD and NZD also outperforming yesterday, although they did give some ground back in the overnight session.
EURUSD and EURGBP remained in narrow ranges with the EUR not taking too much notice of weaker than expected GDP figures from Italy, the finalised GDP reading for Q2 posting -.3% versus -.2% expected. The Senate meeting discussing Berlusconi’s position as head of his party again failed to come up with a conclusion for the second time. Comments from the EU’s Barr this morning highlight that “the debt crisis is not over; policy makers must not be complacent…”
Our concern is that as the Eurozone shows signs of improvement, capital will flow from the periphery to the core, widening the economic disparity already in place and putting further pressure on those members struggling under austerity programs, high unemployment (particularly youth unemployment) and low wage growth are set to continue. Data from Germany this morning supported Draghi’s comments last week that he does not see inflation in German data, with Augusts CPI reading posting 0% inflation.
The big data release of the day comes in the form of UK employment figures, similar to the Non Farm payrolls all jobs data from the UK is now going to be closely watched as a guide for possible rate increases. As it stands we are still a long way from the target 7% and no change is expected today from the current level of 7.8%. It is expected to take several years (2016/17) for this rate to drop back to target, the equivalent of approx 750k jobs added to the economy.
Jobless claims are expected to drop by 21k also continuing the trend of improving conditions. These releases carry a good probability of volatility should the figures surprise on either side, the pound has been the benefactor of very strong data over the last three weeks and there is a lot of positivity priced into GBP crosses, a miss will see the give back some of its recent gains, although a strong reading may push it to fresh territory both against the USD and EUR.