Market sentiment and investor confidence were the main driving forces behind currency market movements this week. Higher US consumer confidence began a broad-based push higher on Friday and the trend continued after the release of the G20 communiqué.  The G20, who met over the weekend, said in its statement that advanced economies would aim to at least halve their deficits by 2013. Regarding regulation the G20 confirmed that no global bank levy would be implemented and that though there was a consensus on tighter banking regulation each country would be left to determine their own regulatory position. Bank of England MPC member Andrew Sentance further supported sterling with comments to Reuters saying that Britain’s tough budget did not remove the need to start raising interest rates now. The hawkish comments and resultant market expectations of interest rate hikes before the end of the year pushed the pound higher across the board.

The higher confidence mixed in with the release of Hometrack’s housing survey that showed prices increase slightly y/y and kept the pound pushing higher at the beginning of the week.

Market focus remained on the state of Europe’s sovereign debt and risk aversion was never far behind. UK economic data set the stage for a pull back in sterling  gains. UK Mortgage approvals came out in line with the previous release but fell short of expectations, GfK consumer confidence dropped slightly while Nationwide’s house price index dropped to 0.1% from 0.5% in May. The pound spent the remainder of the week at the mercy of euro and dollar movements which allowed the pound to regain all of its mid-week losses to close Friday at the weeks high versus the dollar.

The euro struggled in the early part of the week as sovereign debt concerns weighed on the single currency. Support from the G20 communiqué showing commitment to cutting budget deficits and an improvement in economic data did keep the euro’s losses moderate although concern was clearly visible in euro trade. German HICP y/y for June dropped to 0.8% from 1.2% in May and EU economic sentiment rose slightly to 98.7 from 98.4 previously. Unfortunately concerns over economic stability in Europe still had a  role to play as EU banks were expected to repay their 3 months loans to the European Central Bank, this raised concerns over bank balance sheets and the extent to which new loans would be required.

Fitch and Moody’s rating agency added to investor risk aversion. Fitch releasing a statement that warned Europe’s sovereign debt problems boosts the risk of s renewed recession and Moody’s announced that they were reviewing Spain’s credit rating with a view to downgrade the country.

The initial negative sentiment was reversed though, economic data continued to point to the upside and concerns created by the rating agencies was reduced. German PMI manufacturing rose to 58.4 in June while German and EU unemployment data both showed a slight improvement in the respective jobs sectors. Further confidence in the euro came after the ECB announced commercial banks had taken €131.9bln in new 3 month loans, less than what economist had expected. Spain calmed concerns over a ratings downgrade after a successful bond auction giving an added boost to the single currency.

For the US this week was all about the employment numbers which dictated market direction alongside the continued safe haven ebbs and flows. A resurgence in investor confidence drove the dollar lower initially but as the jobs data and other fundamental releases began to emerge risk aversion again took hold. ADP employment figures dropped to 13K, down from 57K which sparked a round of risk averse trading. In addition to the initial jobless numbers, US ISM manufacturing and pending home sales weakened and put pressure on the dollar as confidence in the euro rose with calmer markets to the later part of the week.

The week ended with the release of the highly anticipated US Non-Farm payrolls numbers, as with the previous ADP release the payrolls numbers came out worse than expected at -125K, analysts had expected -110K. The US unemployment rate improved to 9.5% from 10.1% which created some confusion in the market and although range trading set in on cable, a great deal of volatility remained. The dollar fell sharply against the euro as profit-taking and the recent euro sell off set in and traders prepared for the US independence day holiday weekend.

Next Week

Thinner trading volumes on Monday are unlikely to significantly aid the US dollar although by Tuesday the return of US traders could see some positions being unwound and volatile trade may ensue. US ISM non-manufacturing data is also released on Tuesday which is the main economic data release for the States next week.

UK and European markets will focus on the Bank of England and European Central Bank rate setting meeting on Thursday. Neither central bank is expected to make any changes to their respective lending rates or quantitative easing schemes. Analysts will again be interested to see if there is any change to the ECB’s stance on the European sovereign debt crisis and will be interested in the tone of the banks position on the EU financial sector and market liquidity.

Economic Data Releases