Euro's Post-ECB Weakness Continues, Focus Turn To UK PMI Services And US

Euro was sold off sharply as markets showed their dissatisfaction in ECB's lack of concrete announcement. EUR/AUD and EUR/CAD dived to new record low while EUR/USD and EUR/JPY were stuck in middle of this week's range. An important point to note is that Spanish 10 year yield jumped a massive 43.3 basis point and settled above 7% unsustainable level again at 7.165%. Italian 10 year yield also rose by 39.6 basis point to settle at 6.327%. Bear in mind that Spanish yield made a historical high at 7.751% last week and eyes are back on whether this level would be breached again in near term.

As we had anticipated, the ECB left the main refinancing rate unchanged. Although the ECB paused in August, it stressed that bond purchases will be reactivated. Regarding this, Draghi stated that the ECB would only support countries that have requested funding from EFSF / ESM and have accepted the accompanying conditionality. This pre-requisite is inline with our forecast. Moreover, Draghi stated that bond purchases by the ECB would be under a different modality from the SMP- the purchases would be made with high transparency and would focus on the short-end of the yield curve. As for the plan, he said that the Governing Council "will consider further non-standard monetary policy measures according to what is required to repair monetary policy transmission" and will "design the appropriate modalities" in the coming weeks.

As for today, the first major focus is UK PMI services which is expected to improve to 51.9 in July. Sterling faced countering buying and selling pressures recently and thus it's stuck indecisively inside range against dollar and yen without a clear outlook. On the one hand, safe haven flow from Eurozone debt crisis provided some support to the pound. On the other hand, markets were generally disappointed by UK economic data, including the -0.7% contraction in Q2 GDP, and this week's sharp fall in PMI manufacturing to 45.4. Nonetheless, Sterling's weakness is very clear in GBP/AUD considering that it was at 1.6184 back in May and it's now at 1.48 level. More downside surprises in economic data should GBP/AUD further lower towards 1.4554 historical low in Q3. Other data to watch in European session include Eurozone PMI services final and retail sales.
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From US, major focus will be on Non-farm payroll which is expected to show 100k expansion in the job market in July with unemployment rate unchanged at 8.2%. The ADP employment report released earlier this week posted 163k growth in the private job sector, which was a pleasant surprise. However, note that the employment component of ISM manufacturing index deteriorated sharply from 56.6 to 52.0 in July, and, that's the worst number in a year since last August. There's little chance of an impressive upside surprise today and markets could indeed be hoping for a poor sub-50k number to push Fed closer to QE3. Also, focus will be on ISM non-manufacturing, which is expected to improve slightly to 52.5 in July.