Given the current level of unrest in Egypt and the financial markets usual reaction to these sorts of events, one could have assumed (as most market commentators did) that the week would begin with risky assets down from Friday’s close and safe haven currencies like the Dollar and Swiss Franc performing strongly. But quite the opposite happened, with risk-on currencies like Sterling up almost two cents against the Dollar. This may have been the market building in the potential for a positive UK manufacturing figure which has just been released, showing PMI data at its highest reading since 1992. Sterling has steamed through 1.61 on the Dollar and 1.17 against the Euro, but we need to consider the positive manufacturing data with a continued deterioration in the UK housing market. Mortgagee lending shrank as did mortgage approvals and if we also take into account the disappointing GDP figure from last week, current Sterling levels look unlikely to hold, especially against the Dollar.
One of the main drivers of the recent Euro strength has been the prospect of increasing Euro zone interest rates. ECB president Jean Claude Trichet has been increasingly hawkish over above target inflation and yesterday’s CPI reading, again above target, has only increased the prospect that rate rises in Europe will proceed those in the UK and US. The Euro is currently at a key level in the EURUSD pair, with 1.3740-50 very important in deciding the next step. If the Euro does manage to break through, the next key level is all the way up at 1.3950. We are still uncertain over the exact path, but the pair does seem to be entering overbought territory and further sovereign debt issues wait in the wings, ready to rear up as soon as this current bout of Euro strength runs out of steam.
US ISM manufacturing data are also released today, with a slight increase from last months figure expected. Friday sees the latest non-farm payrolls and unemployment rate released and on Thursday the ECB interest rate decision.
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