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Broad aversion to the US dollar has continued overnight as market participants seem more attuned to the belief that we will see further measures taken to reinvigorate the US economy by the Fed soon. The likelihood of an expansion of the money supply via quantitative easing increased yesterday as the Philly Fed measure continued to decline.

The slowdown in manufacturing is symptomatic of a recovery grinding to a halt while new orders also slipped for the third consecutive month. I expect the erosion of demand will be felt throughout the US in the coming quarters. It is, in my opinion, a certainty that the Federal Reserve will launch a second round of quantitative easing (QE2) in the coming weeks to avoid this deterioration turning into decay.

As a result we are seeing some dollar selling this morning, particularly against GBP and the euro. Sterling continued to remain well bid yesterday despite a poor retail sales figure. Sales fell by 0.5% against an expected 0.2% jump so yet again another economic indicator is showing us that the green shoots we hoped summer would nourish are being trampled. It is not a surprise however after numerous High St bosses have warned of pain and further demand falls as we move into ‘cutting season’. This likely marks the beginning of a marked deterioration in consumer and business confidence measures in the lead-up to Christmas.

Needless to say the market ran with the US Fed easing story more than a poor retail sales figure here in the UK and the dollar is off as a result..

There is talk of movement by ratings agencies today with possible downgrades for Spain, Portugal, Ireland and/or their banking sectors. Asian trading was positive overnight and European equities have opened in the green as well however so risk is definitely ‘on’ this morning.

There is no news from the UK today so we expect a quiet morning before US CPI at 13.30 and Mich Confidence at 14.55. It is also quadruple witching in the US so we expect the close to be fairly whippy.

Have a great weekend