Despite better than expected US consumer confidence data for August which came in at 53.5 against an expectation of 50.5 yesterday last month was a month to forget for risk with equity markets down across the board, and oil prices also slipping back on fears of weaker demand.

 

Gold stood out as the yellow metal continued to benefit from a flight to safety along with significant gains for the Swiss franc and Japanese yen, while the US dollar which usually benefits from safe haven capital flows slipped back, suggesting a shift away from the greenback in investor sentiment with respect to safe haven currencies.

 

The published minutes of the August FOMC meeting were pretty much as expected with differing concerns amongst members about how markets would perceive the decision to keep the balance sheet unchanged.

Unsurprisingly Kansas Fed President Thomas Hoenig remained the sole dissenter with respect to the loose language in the statement as well as further stimulus measures.

 

After last weeks focus on the US GDP numbers the markets gaze now shifts to this Friday's main employment report in the US, but before that there is the small matter of today's ADP employment numbers for August, which are expected to show a net change of 20k, and the ISM manufacturing data, which is expected to fall from last month's 55.5 to around 53.0. Both these figures need to surprise to the upside for investors to dip their collective toes back in the water and become less defensive, and economic data out of Asia earlier today could well help risk appetite in that respect, after Chinese PMI in August rose to 51.7 from July's 51.2 and above expectations of 51.5, while Australian Q2 GDP rose 1.2% against an expectation of a rise of 0.9%.

In Europe and the UK the publication of August PMI data is expected to show that manufacturing continues to expand at a consistent rate with UK PMI expected to slip slightly to 57 from the 57.3 reading in July.

 

However with gold returning near to this year's all-time highs against the dollar, the euro and the pound, it is clear that investors remain to be convinced about an economic recovery and continue to hedge their exposure to riskier assets.

 

 

GBP/USD - the pound's lack of upside momentum finally gave way to some capitulation selling on the crosses yesterday, particularly against the Swiss franc where it broke 2 year lows at 1.5800, which dragged the cable below both the 50 and 200 day moving averages in the process, heading towards the 1.5320 level, which is the 38.2% retracement of the up move from the 1.4230 lows to the recent highs around 1.6000. A break below 1.5320 would then open up 1.5115 which is the 50% level, while the pound would need to regain and close above the 200 day average around 1.5440 to stabilise in the short term.

 

EUR/GBP - the euro had a pretty good day against the pound yesterday pushing above last weeks highs at 0.8245, but stopping short of the 0.8300/10 resistance level. Over the past few days we have seen a couple of potential bullish candlesticks on the daily charts, however the lack of follow through remains a concern while below the 0.8300/10 resistance.
The failure to see the single currency close last week below the key 0.8165/70 level was a concern I highlighted in yesterday's note being that it is the 50% retracement move of the 2007/2008 uptrend. A test of the previous lows at 0.8065/70 or the 0.7785 level is unlikely to happen until we see this chain of events unfold.

 

EUR/USD - the 50 day moving average at 1.2780 continues to act as a cap on euro gains; however it has also been unable to break below the key 1.2605 support level over the past couple of days. A close above the 50 day average at 1.2780 is needed to see the euro push back towards last week's highs around 1.2920, but it shouldn't negate the overall bearish sentiment surrounding the single currency. We still expect to see a break and close below the 50% Fibonacci retracement level at 1.2605 which would then target the 61.8% Fibonacci retracement level at 1.2435.

 

USD/JPY - yen strength remains the order of the day despite the additional stimulus measures announced by the BOJ at the weekend it has posted its 4th successive monthly rise against the greenback. The dollar will still remain susceptible to the odd short squeeze of the like we saw on Friday, but until such time as the market is able to take the dollar above 86.25 then further downside is the preferred scenario. The new 15 year lows of 83.60 remain the next target to aim at as the market looks to test for further US dollar declines towards the 80.00 level.