Through the euro zone sovereign crisis the euro has found underlying support in its comparatively higher interest rates and the prospect of further tightening from the ECB. Thus, the growing perception (which intensified after yesterday’s ECB press conference that the central bank could be less aggressive in tightening monetary policy than originally anticipated has hit the euro hard. It fell sharply versus the dollar and other majors over yesterday, hitting lows of $1.405 before finding some support there.

The euro has also been hit by the general spike in risk aversions on growing concerns about the outlook for the global economy as well as fears that fiscal problems in European periphery are spreading to core economies and the sharp sell off in equities. The main focus today will be the US non-farm payrolls report for July. The June payrolls report proved to be very disappointing and this month’s consensus forecast for a rise of 85,000 is unlikely to lift spirits too much. Indeed, a disappointing number is likely to further undermine general market sentiment going into the weekend and generally strengthen the USD on a shift in risk – with the USD likely to be seen as a safe heaven.

The Bank of England also left interest rates on hold yesterday, again in line with expectations. The central bank made no statement, with sterling showing little reaction. The GBP was instead driven by international events including the decision by the ECB to extend liquidity operations, which is providing support versus the euro with the GBP/EUR rate falling through Stg0.87p late yesterday. Sterling has, however, slipped back versus a broadly stronger dollar. As concerns over the global economy continue to build crude oil prices fell below $86 in early morning trade, heading for their biggest weekly drop for over three months. Other commodities also fell back on talk of falling demand.