Daily currency report

The single currency is now within striking distance of cementing two-month highs versus the US dollar with Mario Draghi hinting that buying three-year government bonds could be the solution to bringing down borrowing costs across the euro area and for Spain in particular.

With confidence around Europe’s fight against the debt crisis keeping a lid on disappointment attached to global economic news recently, the safe haven US dollar is looking vulnerable ahead of a trading session.

Still, the pound could slip up following weak UK retail sales report which is likely to create some nervousness before data on Britain’s unstable construction sector. The euro could also lead a downturn for currencies perceived to be risky if meetings between governments across Europe fail to encourage the ECB’s struggle to restore confidence in the euro area.

Sterling

Cable took another step towards reaching four-month peaks after a measure of British manufacturing showed that factories had been busier than expected. CIPS’ PMI survey tracking manufacturing activity printed at 49.5 for August, beating predictions of a much smaller gain from July’s revised 45.2 result to a level of 46.0.

US dollar

ISM’s August manufacturing index is forecast to have improved from the previous month’s 49.8 reading to 50.0 which would represent a recovery from two consecutive periods of contracting activity. If realised, the data may help the US dollar pull back from current lows, although markets could remain a little unresponsive in front of European Central Bank announcement and appetising US jobs report.

Euro

The euro has broken through psychologically important price levels against the US dollar after comments from President Mario Draghi suggested the European Central Bank will finally outline its new crisis-fighting plan during monetary policy announcement. Draghi hinted that the ECB may start buying three-year government bonds to help keep countries such as Spain afloat and avoid anymore international bailouts.

Australian dollar

The Australian dollar advanced t after the Reserve Bank of Australia left its interest rate target unchanged at 3.5 per cent following its latest policy meeting. The move was widely expected and keeps Australia’s benchmark cash rate as the highest among the developed world. However, the so-called Aussie dollar is still languishing near two-month lows against the British pound with the central bank warning the economy’s outlook still remains uncertain.