The currency blog

Just when you thought it was safe to get back into the water after the previous EURUSD short squeeze, we see a 2% move up in the pair and it now trades over 1.25. The combination of the successful Spanish bond auction, speculation of a disappointing US jobs number later today and fears over a US double dip recession all helped the Euro climb against the Dollar. However, the fall-out from the ECB rollover of €442 bn of bank funding has delivered a relative tightening of monetary policy compared to other countries. The subsequent yield advantage of the Euro has been quickly identified by the market and has driven up the price of the Euro against both the Dollar and Sterling. A weaker Euro is needed to drive growth in the Eurozone over the medium term, so the result of the ECB policy of shoring up a trembling Eurozone banking system has been slightly counterproductive. The announced austerity measures across the Eurozone will need to be offset by foreign demand for growth to continue, something that a stronger currency makes less likely.  Whether the ECB sees this as a temporary blip in the downward trajectory of the Euro or we see further Euro strength, it is clear that this issue will be at the front of policy maker minds over the coming months.

Expect light trading this morning in GBPUSD as we wait for the Non-Farm Payroll data this afternoon. The consensus forecast is -110K jobs, that is 110,000 jobs lost over the month, which sounds large until we take account of last months increase due to census workers. The Dollar is coming under pressure as fears mount over the stalling economic recovery in the US so strong employment numbers would be a welcome rest bite from the bearish sentiment that has taken hold.  The battle between those who want to implement European style cut to public spending and those who feel cutting now would derail a already fragile recovery is raging, and it is the outcome of this which will set the theme for the dollar moving forward.

Sterling has taken a back seat over past couple of days, with events in the Eurozone and US determining the exchange rate rather than data from the UK. Slipping under the radar was the news that the ONS delayed the release of GDP data on Wednesday due to errors in the dataset that is used to calculate it. Quite what this means for Sterling is not clear as yet, the official release date has been put back to 12th July but it is a real embarrassment for the ONS, and given the importance of data releases for the forex markets, any loss of confidence in British data will undermine sterling.

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