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Yesterday’s non-farm payroll data came in weaker than expected with feedback that US employers shed nearly half a million jobs and the unemployment rate jumped to 9.5%. This continues to fuel concerns on economic recovery and contributed to a broad sell off in the equities market with the Dow off 2%, S&P 2.3% and the Nasdaq down 2.3% also. The dollar surprisingly did not gain on the news- the swing towards risk aversion benefited the Japanese Yen to a greater degree. The jobs data serves another cold dose of reality for the markets and indicates the recovery road could be slow and bumpy. We have a US holiday today for Independence day and the market will now focus on the US earnings period kicking off on Wednesday next week- however be careful of thin trading causing extra volatility within the current dollar trading ranges of 1.62-1.66 against sterling and 1.38- 1.42 on EUR/USD.

Today we have eurozone retail sales, in April we saw the first increase for seven months with the Easter holiday and good weather helping the number. The consensus is for a slight decline for May. There was no change as expected in interest rates for the European central Bank. In the statement following the decision ECB president Trichet urged the banks to live up to their responsibilities and improve their capital base by taking advantage of government measures to re-capitalise. He added that economic activity is likely to remain weak although the pace of decline will be less than the first quarter of this year. The ECB is not planning any new monetary policy initiatives. The Euro lost a little ground after the decision against sterling and the USD but nothing to get excited about.

Finally some good news for Ireland as June services PMI rose to 42.3 from 39.5 in May- the number is still below 50 which indicates contraction but the improvement will be well received.

Expect choppy and thin trading today with no real direction- we have already seen a dip in sterling from open across the board.

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The euro hit a one-month high against the dollar and 1.5% higher against the pound this afternoon after the European Central Bank announced plans to buy around EUR60 billion in debt securities outright, which gave a further boost to global risk appetite. The announcement by ECB President Jean-Claude Trichet came in addition to the ECB’s rate cut Thursday to 1.0% from 1.25%, and helped push the euro to as high as $1.3441, its highest since Apr. 6. The euro roared back against the pound from 0.8779 to hit an intraday high of 0.8933.

Analysts say that while all the details remain unclear, it is likely an attempt to liquefy Eastern European banks, letting them swap local currency bonds into euro-denominated bonds. “It would be the same concept the Federal Reserve is using (although in much smaller quantities), taking weaker, poor-quality debt and swapping it for Treasury’s,” said Andrew Busch, global foreign exchange strategist at BMO Capital Markets. “This provides for additional risk-taking.” Busch noted that the U.K.’s central bank announced a similar bond-buying plan Thursday, which is adding to investors’ appetite for risk, which already was higher overnight on higher stock markets and crude oil prices.

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Forex News - EURGBP

The main focus on the economic calendar today will be the European Central Banks monthly meeting on interest rates. So far the ECB has resisted in following the format of aggressively cutting interest rates and introducing “unconventional” measures such as Quantitative Easing. Today they are expected to cut interest rates by at least 25 basis points and possibly announce other measures such as buying debt to stimulate growth in the euro zone. Some analysts are expecting a dramatic move from the ECB in relation to the purchase of bonds- others feel that the ECB could maintain their cautionary approach. Division has recently crept into the ECB committee on the action required and in the light of continuing weak data and a sharp downgrading in GDP forecasts you feel that today clarity and action is required. We have already witnessed selling pressure on the euro against sterling and the dollar as we head towards the meeting.

We also at midday have the result of the UK MPC meeting with no change expected. Comments may be made on the effectiveness thus far on the introduction of Quantitative Easing but no changes to current QE measures are anticipated. It is felt by some analysts that the QE cash generated is failing to get through to the real economy due to banks hoarding the extra cash- credit conditions remain tight and although it is too early to effectively judge QE the Treasury will be concerned.

Focusing on economic data today we have seen retail sales in Europe fall by a record amount over the last 12 months- sales were down 4.2% between March 2008 and 2009- this is adding to selling pressure on the euro. In the UK yesterday we saw an improvement in the services sector boosting hopes of an economic revival in the UK and helping sterling to edge higher across the board. Norway cut interest rates by 50 basis points as expected and the Canadian finance minister confirmed that there were no plans to introduce QE helping the CAD to strengthen against the USD.

Later this evening we get the results of the stress testing of US banks- overnight US treasury secretary Geithner stated that none of the 19 banks were at risk of insolvency and that the banks should repay the $25 billion owed to the government within 1 year. Yesterday the market was rattled with reports that Bank Of America may require as much as $34 billion in additional capital- however more recent feelers suggest that this may not be the case- we will see later. Any negative results hear should cause a surge back into dollar buying.

Aside from the euro weakness ahead of the ECB meeting- most of the movements are equity market driven. The increased confidence particularly in the banking sector is helping sterling gain and encouraging more investors to seek yield- again we are seeing strength in the AUD, ZAR and NZD to mirror this effect.

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Potential interest rate cut this week by ECB see’s euro lose ground

Weak E/Zone data weighs heavily on single currency

Aussie dollar receives only minor boost as RBoA leaves rates unchanged

Gold back over $900 per troy ounce

 US Dollar:

A rally in equity markets has again seen the usual see-saw relationship with the dollar, with the greenback sold off as investors are tempted into slightly riskier assets, weighing the buck down against it major rivals.

 The dollar lost the most against sterling, as on Friday we saw cable trading at $1.4768, and has now fallen as low as $1.5050. To show just how much the dollar has been sold off, the buck even posted losses against the euro, despite weak economic data from the eurozone dragging down the single currency itself against other rival currencies.

We saw EUR/USD fall over a cent from $1.3255 to $1.3338, even with the view that the ECB are looking to cut interest rates this week, which would normally weaken that currency. There was also news that the

US is expected to direct about 10 of the 19 banks undergoing government stress tests to boost their capital.

 Pound:

The day off for May Bank Holiday seems to have done the pound some good, as it takes a back seat at being the currency no body wants to hold, with the euro and dollar being sold off since late Friday afternoon. Cable has benefitted from a drop in risk aversion, with GBP/USD moving back over the $1.50 level to trade over $1.5050 this morning. This is a gain of nearly three cents from Fridays $1.4918. As we have seen of late, a rally in equity markets is closely followed by a sell off for the dollar, giving cable its much welcomed boost. Sterling also saw a rise against the euro with the single currency coming under pressure after negative economic data was released yesterday, and a potential interest rate cut this week by the ECB.

Sterling has now taken over 1% from the euro to trade over 1.1250 this morning. The pound has dropped again against the Aussie dollar, as the RBoA left interest rates unchanged, giving the Australian currency a small boost, on top of its recent gains as the currency investors choice of currency.

Euro: The euro fell against the dollar and pound yesterday and today, giving back some of its recent gains amid concerns over the eurozones poor economic outlook ahead of a key meeting of the European Central

Bank later this week. The single currency has rallied in recent weeks amid a global improvement in risk appetite, but the eurozone economy has failed to show significant signs of recovery, which may hurt demand for eurodenominated assets. At the same time, the ECB is widely expected to cut rates on Thursday to 1% from 1.25%.

 Despite the negative news for the euro, we have seen a cent rise on the buck as we trade over $1.3340 this morning. The euro has however suffered against sterling, as we have seen a drop of 1.2% to fall from Friday’s price of 0.8979 to 0.8873 this morning. German and eurozone PMI indexes released yesterday came in only slightly higher than expected, while German retails sales fell 1% month-on-month in March which was a disappointing reading.

 General:

The Australian dollar received only a minor boost after the country’s central bank kept interest rates unchanged at 3%, inline with expectations. The news is a mild positive for the Aussie dollar, as it will maintain positive interest rate spreads against other major currencies for the time being.

 Spot gold was up $1.60 at $904.45 a troy ounce adding to a strong performance in New York.

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Last month the European Central Bank (ECB) surprised the markets by only cutting interest rates by 25 basis points to 1.25%- a record low but when compared against the UK interest rates of 0.5% and against the US of 0-0.25% then comparatively still high in the current global climate. The market wanted to see more aggressive action amid rising unemployment and shrinking growth and all eyes will turn to the next ECB rate decision on Thursday. It is expected that another 25 basis point cut to 1% will materialize and the ECB may engage in additional “non conventional” measures- basically some form of Quantitative Easing to help the economy.

The European Union’s economic affairs commissioner recently declared that the European economy was in the “midst of its deepest and most widespread recession in the post-war era” and the euro zone will contract by 4% this year- this is more than twice than forecast in January.

In addition ECB president Jean- Claude Trichet is struggling to keep the ECB’s governing council united with the 22 members split in opinion on how far interest rates should be cut and whether the ECB should buy financial assets from the banks- so much is the wrangling that a vow of silence has been imposed on officials! The German finance minister Peer Steinbruck has also noted concern that “competitive imbalances have built up within the euro area, increasing the exposure of some member states to the financial turmoil”. There is also a worry of other countries losing their competitiveness within the eurozone- in particular Italy and Greece.

Stateside, the Fed plans to deliver results of stress tests on US banks to executives today that may show about 10 firms need additional capital to weather a deeper recession. An obvious way for banks to fill their capital requirements is via conversion of preference shares to common shares.

Last week, the Fed delayed the release of the tests that were originally scheduled for yesterday, as banks challenged some of the conclusions. 19 banks have been stress tested. Citigroup and Bank of America were allegedly among the banks found to need additional capital. It is rumoured that both firms disputed the Fed’s determination. Yesterday Citi rose 7.7% and Bank of America 19% after denying it was working of a plan to raise $10bn. I would be surprised if we didn’t hear more soundbites about the stress tests. The results are likely to be made public later this week.

GBP is performing well testing the 1.50 level against the USD. The last time we were at this level was in mid April. A break above this level opens up the 1.52 level where we saw resistance in early January. GBPEUR has rallied and is currently trading at 1.1270 level, still off the 1.1381 high seen in mid April.

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