Attention focussed on Central Bank meetings tomorrow

The Greenback was once again on the soft side yesterday, cable traded well through 1.7700 and EUR/USD comfortably broke 1.2200. The buck slid for two days despite a run of reasonably positive US economic data as attention once again focussed on the US twin deficits.

The Dollar has subsequently bounced back as the market focus turns to the US jobs report due out on Friday, and any indication it will offer as to the Fed’s longer term tightening campaign.

Solid US data yesterday raised expectations that the Fed may hike rates to 3.5% as early as next Tuesday, and encouraged flows into the US currency. However general sentiment is that the Federal Reserve will need to lift rates higher than 4% next year to help the Greenback extend its flagging rally.

Improved economic fundamentals in the Eurozone have eroded chances of an ECB rate cut at their meeting tomorrow.

Markets will watch with interest, the release of the service sector PMI this morning, it is expected to have edged up to 53.4 in July. Data such as Germany’s IFO reaching 7-month highs and an expected decline in Germany’s unemployment has helped underpin the single currency.

July’s service sector PMI is also due out of the UK this morning and is expected to drop slightly to 55.5. The Bank of England meets tomorrow and is widely expected to cut interest rates by 25 basis points; although this cut has been factored into the market, we could see some sell-off of the pound following the decision as sterling’s interest differential advantages erode.

Asian currencies including the Yen rose yesterday, helped by indications that Japanese deflation may finally be coming to an end, increased optimism was reflected in the equity markets.

However there is growing uncertainty over the future of Japans Prime Minister Junichiro Koizumi. The upper house votes this Friday on the postal reform bill. A rejection could trigger a snap election and cause the collapse of Koizumi’s government.