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Further fears over the size and scale of the US debt problem were highlighted on Thursday as the ratings agency Moody’s said it will put the credit rating of the US Government on review for a downgrade if significant progress is not made in the battle to raise the debt ceiling. Republicans and Democrats in Congress have been beating seven bells out of each other; a recent vote went the way of the Republicans by a significant margin. EURUSD retreated higher on the announcement, hitting fresh 3 week highs above the 1.45 level while GBPUSD also recovered slightly.

As we have spoken of this week, it seems that the stars are aligning for a euro rebound with data and political chat  supporting the single currency. Yesterday we saw a strong bond auction for Spain with an offering of 2015 debt oversubscribed 2.5x and with a yield that, albeit higher than the most recent auction, was below the average on this year’s issuances. There were also reports that EU officials have in principle agreed on a new aid pack for Greece although we have had no official confirmation. There is some volatility forecast for EUR crosses as a result of this weekend’s Portuguese General Election although we believe fears of a euro wobble are overdone; all candidates have agreed to abide by and honour the terms of the bailout and this seems to be the main issue for the markets.

Sterling spent most of yesterday in the shadows although UK construction PMI rose to 54.0 in May; above the 6 month average.

Today’s news is dominated by the American Non-Farm Payrolls number due at 13.30 BST. As we pointed out yesterday the past few weeks of US data (GDP, Initial Jobless Claims, Housing and Manufacturing) have all been terrible and so the likelihood of a stellar jobs report are thin on the ground. As such, the fear is that we see the worst number since January. Asian markets have traded lower overnight as a result of these fears and we expect a general risk-off atmosphere keeping EUR, GBP, AUD and equities weak until the figure is released. All in all however, it is hard to get excited about further USD gains in the short term and we would expect GBPUSD and EURUSD higher over the coming weeks.

The other focus is on the service sectors of the UK, Europe and US as we receive the PMIs and ISMs respectively.

Latest exchange rates at time of writing