The Italian Senate continued to debate the no-confidence motion during Wednesday as Prime Minister Letta looked to salvage his government. There was a high degree of uncertainty over the opposition PDL stance, especially with reports of significant dissent within the party. Eventually, after several switches of direction by Berlusconi, the PDL supported the government which won the no-confidence vote and will now continue in office. There was a sharp drop in Italian yields which helped underpin the Euro.
The US ADP employment data was slightly weaker than expected at 166,000 for September and there was also a downward revision to August’s release to 159,000 from 176,000. Downward revisions have been a thorn in the side for the dollar over the past few weeks and this latest setback curbed any dollar support on yield grounds, especially as it is unlikely that the monthly payroll data will be released on Friday.
As expected, the ECB left interest rates on hold at 0.50% following the latest council meeting. President Draghi reiterated that the bank was willing to take fresh steps if required to curb volatility in money markets, but there were no fresh measures.
As far as the economy was concerned, the ECB remained concerned over the rate of credit growth which was described as weak or even very weak despite improved conditions on the funding side. He also stated that the bank had considered a rate cut, but rejected it.
Markets had been expecting a generally dovish slant from the ECB and his overall tone was not quite as bearish as expected which helped underpin the Euro, although a substantial element is likely to have been short covering as Draghi was still relatively downbeat.
EUR/USD found support in the 1.35 region and pushed sharply higher with a peak above 1.36 before correcting slightly lower. USD/JPY dipped to test support below 97.20, while the US currency was more resilient elsewhere.
The UK PMI construction data release was similar to the manufacturing data 24 hours earlier with a slightly weaker than expected figure of 58.9 for September from 59.1 previously. The data was still firm in historic terms with residential construction notably robust. EUR/GBP advanced to around 0.8370, but GBP/USD was able to make a fresh challenge on 1.6250 as the dollar was subjected to wider losses.
The Australian economic data was weaker than expected with a sharp decline in building approvals and a wider than expected trade deficit which had a negative Australian dollar impact as AUD/USD dipped sharply to test support below 0.9350.