London Session Today's Market Update

On a morning which was overshadowed by the approach of the ECB policy decision and the US June payroll data, it was comments from China that caused much of the price action. The USD climbed after Chinese Vice Foreign Minister He Yafei stated his hope that the USD will remain stable and commented that he was not aware that China had pushed for a discussion of reserve currencies to be on the agenda at this month's G8 meeting.  Speculation regarding the latter had pushed EUR/USD towards the top end of its range in US hours yesterday, this morning USD/EUR saw a low around 1.4085 before EUR buyers emerged.

The better tone of the USD was noted across the board with the AUD and the GBP being clear losers.  This was in tune with the lack of risk appetite evident in the predominantly poorer tone of stocks during Asian and European hours.  Risk aversion has been prompted by the proximately of the US jobs data and is illustrative of the more cautious tone which has emerging in the market with respect to the outlook for the US and global economies.  The printed market median stands at -365K for US non-farm payrolls in June.  However, following worse than expected ADP employment data yesterday (-473K), the market will be prepared for a poorer set of data.  Weaker data may undermine the USD initially, though the dollar would likely to find support from safe haven flows.

Today's decline in cable is reflected in the rise in EUR/GBP.  While yesterday's UK manufacturing PMI data was indicative of stabilisation in the sector, other data this week have been poor.  Sterling has rallied significantly in recent weeks, without stronger data iit could be liable to give back some more of its gains.

Aside from payrolls number, the market is also turning its attention to the ECB meeting.  No change in policy is expected though some further detail of this month's EUR60 bln covered bond auction is possible.  The relatively small size of the latter will reduce its potential for any market impact.  Focus of ECB rhetoric is likely to confirm that policy is oriented towards enhancing liquidity provision, particularly given weak lending data and the negative Eurozone CPI and PPI data this week.  While signs of economic stabilisation are likely to be recognised by the ECB, its outlook is set to remain cautious.

EUR/CHF jumped higher this morning following comments from the SNB's Jordon that he wants to prevent further CHF appreciation and that the SNB remains ready to intervene.  EUR/CHF has not broken above 1.5240 and is liable to give back some of these gains, however, since SNB rhetoric continues to emphasise that it wants to prevent currency appreciation.  There has been no suggestion that the SNB wants to weaken the value of the CHF.  Since 1.50 is still considered to be the SNB's 'line in the sand', the chances of intervention at current levels still seem slim.

The Riksbank surprised the market this morning by cutting interest rates by 0.25% to 0.25% sending the SEK lower vs the EUR.

Aside from the payrolls data, US May factory orders and initial claims are also due.