While European markets managed to post a modest recovery yesterday the rebound was still a pretty mediocre one when set against the declines of the previous day, as some cautious buyers returned to the market, as tensions around North Korea subsided temporarily.

US investors remained more exuberant, with the S&P500 closing higher for the fourth day in succession with tech stocks helping drive gains, as US economic data continued to surprise to the upside, while in Asia a better than expected Chinese manufacturing PMI number for August also kept spirits up.

An outstandingly good ADP payrolls report for August and a positive Q2 GDP revision has shifted expectations higher about the prospect of one more US rate rise by the end of this year, helping boost the US dollar in the process. Inevitably the strength of yesterday’s number has shifted expectations around tomorrow’s official number to the upside along with expectations that wages growth could well follow suit.

This week’s headlines have been of the variety that has seen the pound hit flash crash lows against the euro, while also trading just above the near record trade weighted lows seen in the wake of the 2008 financial crisis.

While some of the negativity can probably be justified on a political level, given how utterly useless our politicians appear to come across from both sides of the political divide, the actual data from the UK economy doesn’t appear to support the prevailing doom and gloom. On a slightly positive note there does seem to be an indication in the past day or so that we may have seen a short term base in some of the recent sterling weakness.

Part of the reason around the weakness of the pound can be laid at the Bank of England’s door and their policy of almost benign neglect of the currency. Bank of England governor Mark Carney warned 10 months ago that the Bank wasn’t indifferent to the effects that the exchange rate was having on the economy as well as the inflation rate, yet has shown no signs recently that it is a cause for concern despite trading just above levels last seen in 2007 on a trade weighted basis.

Later this morning external Bank of England MPC member Michael Saunders is due to give a speech in Wales where he could offer some insight into not only his thinking on monetary policy, which we know given he voted for a rate rise, but also as to whether any other MPC members could well be uncomfortable with the currently dovish outlook for interest rates that the market appears to be pricing in.

If yesterday’s inflation numbers out of Spain and Germany are any guide we could see an uptick in the latest flash estimates of EU CPI for August when they are released later today, with expectations that we could see a move higher to 1.4% from 1.3% in July. Core prices are expected to remain unchanged at 1.2%.

The reluctance of ECB President Mario Draghi to comment on the recent strength of the euro does appear to have raised expectations that the ECB is prepared to tolerate a higher euro in the short term, however while it is true that central bankers don’t generally tend to worry about currency moves of the type we have seen in the longer term, it becomes a different story when it happens over a fairly short three month period.

This may help explain why the euro was unable to sustain this week’s brief move above the 1.2000 area, though a sharp improvement in US economic data yesterday has also helped in this regard. It could well be that after several months of declines in the US dollar a recovery in the greenback’s fortunes could offer the ECB some hope of respite in terms recent euro gains.

It would also help in alleviating the deflationary impact of a 14% rise in the currency since the beginning of the year. On the issue of unemployment there remain deep divergences in terms of economic performance and these are expected to be highlighted in the context of Italian unemployment which is expected to remain unchanged at 11.1%, while on the other side of the ledger German unemployment is expected to remain at a record low.

The more general EU number is expected to remain at 9.1%, a seven year low, but still well above the pre financial crisis lows of March 2009.

EURUSD – this week’s peak of 1.2070 turned out rather short-lived and has seen the euro slide back and having dropped back below the 1.1900 area we could well see a wider fall back towards the 1.1840 level initially on the way to the 1.1600 area. A move back above 1.1950 negates.

GBPUSD – after finding support at the 1.2770 area last week we’ve rebounded back through the 1.2900 area, briefly touching 1.2980 before slipping back. This rebound suggests the potential for a retest of the 1.3040 area in the short term. We need to hold above the 1.2880 level for this to unfold.

EURGBP – matched and slightly exceeded the 2016 peaks at 0.9300 before slipping back. The failure to consolidate suggests we could head back towards the 0.9040 area, on a break below the 0.9180 area.

USDJPY – we still have solid support down near the 108.20 area for now and April lows and this is currently containing the downside. Rebounds need to get back above the 111.00 area, otherwise we remain at risk of a move towards the 106.80 area.

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