The majors spent most of the Asian and early European session quietly consolidating gains as calm finally returned to financial markets on a day with little fresh news from the sub-prime sector. The announcement that Bank of China carried nearly 10 Billion dollars of exposure to asset-backed bonds on its books had little impact on trade, partly because the Chinese bank is well capitalized and partly because the marked is becoming somewhat inured to stories of MBS risk. Traders attention is now shifting to handicapping what effect the past two weeks of volatility in capital markets may produce on the real economy.

So far economic activity in Europe and UK remains buoyant. Overnight EZ Advance PMI Services and Manufacturing data printed essentially in line with expectations. Although both indices slipped slightly from their readings the month prior they remained well above the 50 boom/bust levels, and the composite PMI actually beat expectations. Clearly, the higher euro and the decline in US consumer demand is having some negative impact on EZ growth, but overall the economic performance in the 13-member region continues to follow an expansionary path which should maintain a hawkish bias in ECB monetary policy for the time being.


In UK the GDP numbers also met forecasts with growth coming in at an impressive 3.0% annual rate. Private consumption was bit higher than the consensus call printing at 0.8% vs. 0.7%. The pound firmed in the aftermath of the news but its is unclear if tonight’s data was strong enough to justify a policy change from the BoE. It was however, certainly constructive for the pound as it showed that at least presently UK economy continues to grow at a healthy pace, leaving open the possibility of a bump to 6% rates by year’s end.

The most important event risk of the day is likely to come from the US calendar as New Home Sales data and Durable goods are both due at the start of the US session. While the expectations for New Home sales are understandably low given the persistent problems in the housing sector, the Durable goods ex- transports report may prove to be the more interesting piece of data. The market is looking for a rebound after last month surprising decline. However, if the Durable Goods number misses to the downside once again, printing a negative reading for the third consecutive month, fears of a US economic slowdown may start to weigh on the greenback as we close out the week.

Boris Schlossberg is a Senior Currency Strategist at FXCM.