httpvh://www.youtube.com/watch?v=ZSmAu5q9dOk

It was all about the manufacturers yesterday as Chinese and US PMIs showed a pick-up in sentiment in the sector. Risky assets went on the tear as a result with the FTSE finishing up 2.7% , the S&P gained 2.95% and the Dow Jones put on 2.54%. In currency world this translated to gains for the AUD, CAD and euro with sterling managing to eke out gains against haven currencies such as the JPY, CHF and USD.

The sterling gains haven’t Lasted however and GBPUSD has come back to the 1.54 level overnight having tested 1.55. GBP has also broken lower against the euro in the past 24hrs and looks set to test the 1.20 handle soon (possibly even today). As we said yesterday it seems that all negative news on the euro has been priced and gains are therefore seen when good data is published while negative data does not affect it too much.

Yesterday this was not the case however as it was simple bad data from the UK that sent pound down. Our manufacturing PMI came out at 54.3, worse than the 57.0 economists expected. As a result the prospects of the UK economy being able to export its way out of this crisis is looking unlikely. Our largest single trade customer, the US, is in a dire state with consumption likely to slip further over next 6 months. This further highlights that the economic climate is likely to deteriorate markedly in the coming months in the UK and globally.

Sterling has also been dealt a blow by this morning by Nationwide Building Society’s assessment of UK house prices. The latest research shows that they fell by 0.9% in the past month against expectations of a 0.3% fall. This is the first consecutive monthly fall in house prices since February 2009 and bear out our argument, made earlier this year, that a double-dip in house prices is likely.

Further news of the construction industry is due at 09.30 with the sector’s PMI due. While we expect to see expansion (a figure above 50.0) we think that we will see a fall from the previous figure of 54.2. The big news today is the ECB decision at 12.45. While Q2 GDP figures in Germany were particularly strong, the periphery of the EU are still showing real signs of weakness. In order to increase spending and business development in these regions we would expect to see the Bank offer unlimited liquidity on a 3-month term at the repo rate until the end of the year. They will also hold the main refinancing rate at 1%.

We also have EU GDP at 10am, US initial jobless claims at 13.30 and factory orders at 15.00.