Today's Market Update

Disappointing results from Microsoft, Amazon and Amex overnight deflated the enthusiasm that started to build after the DJIA broke the 9000 level yesterday afternoon. Sentiment thus reversed sending investors away from 'risky' currencies and back into the yen in Asian hours. From an overnight low in the 133.85 area, EUR/GBP climbed back to the 135.00 area in London hours supported by the ability of stock market to hold a positive tone. EUR/USD has climbed from 1.4135 but has been unable to hold above 1.4220 in London. The release of Germany's better than expected July IFO index at 87.3 from 85.9 in June and an improvement in German and Eurozone July PMIs also supported an improvement in risk appetite in early London hours. However, the 08:30 GMT release of UK Q2 GDP was a huge negative shock. GDP contracted by a far greater than expected -0.8% q/q, -5.6% y/y in Q2. This is a massive setback for hopes that the UK economy could see growth again by the end of the year. Insofar as the UK is the first G7 country to report Q2 GDP it will also likely increase caution in the run up to GDP reports from other major economies. Cable plummeted to the 1.6440 area on the back of this news; EUR/GBP headed back to 0.8640.

The shockingly poor UK Q2 GDP brings a fresh twist into the outlook for QE. Only yesterday afternoon the gilts market was hit hard by comments from the BoE's Sentance that asset buying by the BoE may pause if justified by forecasts. Today's data, however, suggest that the economy's struggle to recovery from recession is proving to be harder than expected. This increases the chance that the BoE may, after all, increase its QE program following the next MPC meeting in early August. Such an outcome would be negative for the pound. Cable is presently trading a range between 1.6310 and 1.6585, and increase in QE could increase the risk of a break lower.

USD/CAD has dropped to the 1.0850 level this morning, the CAD's strongest level since early June following an overnight comment from Trade Minister Stockwell Day that Canada is not concerned about the current level of its USD. The BoC weakened its rhetoric with respect to the detrimental economic impact of CAD strength this week after its policy meeting and in its Monetary Policy Report. The BoC also stated this week that Canada's recession was ending this quarter. This softer rhetoric sparked a CAD rally earlier in the week and, without any renewed threats of intervention near-term, the CAD should stay well supported. There are no key Canadian data releases today.

The market is expecting a modest improvement in this afternoon's US final July University of Michigan confidence survey.