Market positioning had an important impact on Friday, the last trading day of the month, especially with the US Labour day on Monday. Liquidity levels were below normal which tended to dampen market movement for much of the day, punctuated with brief spikes in activity.
There was further caution surrounding the situation in Syria with parliament’s refusal to back potential military action by the UK further complicating the issue. There was still speculation that the US could push ahead with an attack with potential French support, but with a high degree of uncertainty and a reluctance to take aggressive positions.
Emerging markets also remained a focus and there were some reports that recently-hit countries including India and Brazil would look at measures to defend their currencies. This could provide some relief, but market conditions remained very nervous.
Euro-zone economic data releases had little impact with unemployment steady and in line with expectations at 12.1% while the flash inflation rate moved lower to 1.3% from 1.6% previously. At the margin, lower inflation could give the ECB more scope to cut interest rates in the future and offset tightening monetary conditions which would hamper the Euro.
The US personal income and spending releases were marginally weaker than expected which did not have a major impact while a subdued reading for core prices maintained expectations that inflation would stay low. There was a small gain in the Chicago PMI index and an improvement in the final University of Michigan consumer confidence index which had some positive dollar impact.
Markets remained focussed on the crucial labour-market data next week amid expectations that the data would be strong enough to keep the Fed on track for tapering of bond purchases at the September FOMC meeting. Expectations of at least a measured tapering were important in sustained yield support for the US currency. The dollar maintained a generally firm tone and EUR/USD was unable to move above the 1.3250 area with a gradual slide to near 1.3200 after the Wall Street open.
UK economic surveys remained generally upbeat with an upward revision to GDP forecasts amid optimism surrounding third-quarter data, but Sterling was hampered by month-end selling pressure. GBP/USD retreated back below the 1.55 level and the UK currency was unable to make further headway against the Euro with a sense of caution ahead of very important PMI surveys next week.