Euro Benefits from Deteriorating US Economic Outlook (page 2 of 2)

Meanwhile, the Swiss franc rallied significantly today despite a drop in consumer prices. With gold prices up sharply, this may reflect flight to safety.

Swiss unemployment and the SECO consumer climate reports are due for release next week. Overall, the Swiss economy has been doing very well, which is why we expect both reports to be firm.

British pound breaks 2.04, quarterly inflation report expected

It has been a strong week for the British pound despite mixed economic data. Even though activity in both the manufacturing and construction sector accelerated in July, service sector activity slowed.

All of these indices remain well above comparative US levels, which is the reason the currency has outperformed the US dollar.

The Bank of England left interest rates unchanged, which made the rate decision a non-event, but next week Bank Governor Mervyn King will be delivering his Quarterly Inflation Report. Based upon the price action in the British pound, traders expect the Bank to remain hawkish and signal the possibility of another rate hike this year.

Although this is the most likely scenario, when it comes to the Bank of England, always be prepared for surprises since the UK is also being hit by the US subprime problems. According to the Council of Mortgage Lenders, foreclosures have hit an eight year high.

Canada, Australia and New Zealand set to release employment reports

The Canadian, Australian and New Zealand dollars are slightly weaker today. Canada released much softer than expected IVEY PMI.

Analysts were already looking for a seven point drop, but instead, the index dropped a whopping 13.2 points. This indicates that the strength of the loonie is finally having a big impact on the Canadian economy. The drop in the employment component of the report also suggests that next week's employment numbers will be weak.

Australia and New Zealand will be releasing their own employment reports as well. The employment component of the stronger Australian service sector PMI suggests that the labor should remain tight. The New Zealand labour market should also hold steady.

Historical movements of the yen crosses

Over the past week, the Japanese yen crosses have moved in lockstep with the Dow and today was no different. With the exception of EUR/JPY and CHF/JPY, all of the other yen crosses gave back its prior day's gains.

The growing problems in the US continue to weigh heavily on the market's appetite for risk. Even though it may feel painful for carry trades at the moment, the three per cent that we have seen thus far is marginal compared to how much carry trades have moved historically.

There was not much Japanese data to help the yen this week but the week ahead is more promising with a relatively busy Japanese calendar, which includes the corporate goods price index.