e have mentioned in the past couple of weeks that a retracement in the dollar could be on the cards in the near-term, particularly given the very stretched levels of investor positioning – euro net longs are at record highs, while dollar net shorts are around their highest level in nine years. This can be partly attributed, we think, to the currency’s recent pullback, with investors realising some short-term profits ahead of tomorrow’s US nonfarm payrolls report. A rally in US stocks to fresh record highs has also helped draw investors to the dollar, in our view.

Investors mostly overlooked yesterday’s underwhelming ADP employment change number, which bodes ill for the more meaningful nonfarm payrolls report later in the week. Private US companies added 428k jobs last month, around half what economists’ had anticipated. Given the recent lack of correlation between the strength of this number and the corresponding NFP figure, the market will be hopeful of a slightly more upbeat reading tomorrow afternoon.

Euro reverses gains as investors brace for dovish ECB

The aforementioned recovery in the dollar was among the most pronounced against the euro on Wednesday, as investors grew increasingly concerned surrounding next week’s European Central Bank meeting. This month’s ECB meeting is likely to take on greater importance than expected a matter of a few days ago after the release of the pretty dismal August inflation numbers for the Euro Area. This has raised expectations that the bank will adopt an even more dovish stance at its meeting next week, and could potentially lay the groundwork for an increase in its stimulus programme later in the year.

The euro did, at least, find some footing following this morning’ Eurozone services PMI, which rose to 50.5 in August from July’s 50.1. An unexpected decline in German retail sales in July is much more of a concern, particularly given the waning reliability of the business activity sentiment indices.

Bailey keeps negative UK interest rates on the table

Sterling was able to mostly hold its own against the broadly stronger US dollar yesterday, although the UK currency did edge slightly lower as London trading opened this morning.

The pound came under a bit of selling pressure on Wednesday after governor of the Bank of England Andrew Bailey refused to rule out the possibility of taking interest rates into negative territory to combat the impact of the COVID-19 virus on the UK economy. Bailey noted that sub-zero rates were ‘in the box of tools’ at the bank’s disposal, while stating ‘if it was the right thing to do, then the case for bringing it out of the box would be strong’. He did, however, reiterate that there were no immediate plans to cut rates into negative territory, suggesting to investors that there would need to be a fairly significant deterioration in economic conditions in order to warrant such action. The market therefore took Bailey’s comments in its stride, with sterling continuing to find support above the 1.33 level versus the dollar.

Next up will tomorrow’s UK construction PMI from Markit and a speech from BoE member Michael Saunders.