Euro, British Pound Rally Ahead of U.S. Session on Risk Appetite

Talking Points

• Japanese Yen: Weaker Against Most Counterparts
• Pound: Manufacturing Expands at Slower Pace
• Euro: Portugal Increases Yield on Bills
• U.S. Dollar: ISM Manufacturing, Construction Spending Tap

Meanwhile, Portugal sold EUR 500B of government debt due in March with an average yield of 2.045%, which compares with 1.96% offered last month, and issued another EUR 512M bills due in August, yielding 2.756% versus the 2.727% tender from the previous month’s auction.

At the same time, Portugal’s STE, a union for state workers, requested at 2% increase in wages for 2011, while a separate labor group, CGTP, is asking for at least a 3.5% rise in wage growth according to an article in a domestic newspaper, and the government may fail to meet these demands as it struggles to manage public finances and scales back on spending. As the global financial system remains fragile, with the governments operating under the single-currency tightening fiscal policy, the European Central Bank is widely expected to hold the benchmark interest rate at 1.00% tomorrow, but the press conference following the rate decision is likely to move the currency market as President Jean-Claude Trichet maintains a cautious outlook for the region. Nevertheless, the economic docket showed retail spending in Germany unexpectedly slipped 0.3% in July amid forecasts for a 0.5% rise, while the final PMI reading for the Euro-Zone showed manufacturing expanded at a slower pace in August, with the index falling back to a revised 55.1 from 56.7 in the previous month.

The British Pound halted the three-day decline and bounced back during the overnight trade to reach a high of 1.5417, but the lack of momentum to push back above the 200-Day SMA at 1.5438 could lead pair to retrace the June rally as it maintains the downward trending channel from the August high (1.5997). However, as the 50-Day SMA (1.5428) looks poised to break above the 200-Day SMA, the bullish crossover suggests that the GBP/USD may continue to push higher over the near-term as the recent downturn appears to be a corrective retracement. Meanwhile, manufacturing in the U.K. expanded at a slower pace in August, with the PMI reading falling back to 54.3 from a revised 56.9 in the previous month, which marked the lowest print since November, and businesses may continue to scale back on production over the coming months as policy makers continue to see a substantial amount of slack within the real economy.

The greenback weakened against all of its major counterparts, with the USD/JPY slipping to a low of 83.87, and the greenback could face increased selling pressures throughout the day as investors raise their appetite for risk. However, the economic docket is expected to show manufacturing expanding at a slower pace in August, with market participants forecasting the ISM index to fall back to 52.7 from 55.5 in the previous month, while construction spending is projected to fall 0.5% in July after tipping 0.1% higher in the month prior.

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To discuss this report contact David Song, Currency Analyst:dsong@fxcm.com

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