A weak round of data from the US and Europe yesterday has hit market sentiment, with July’s disappointing manufacturing ISM and PMI surveys underlining concerns about recovery in the global economy. The news of a debt deal in the US offered some support to the dollar versus the euro as did the spike in risk aversion. However, upside is seen as limited given that there are still many fiscal challenges that the US has to face, including the prospect of a debt downgrade. Meanwhile, speculation that Japan could carry out yen-selling intervention sent the JPY down versus other majors in Asian trading overnight. Finance Minister Noda said he would “like to watch market movements closely today, particularly after the progress in the US debt issue,” adding that the government is talking with the Bank of Japan and other countries about yen strength. However, despite the rhetoric, many believe that any such action would likely only have a short-term impact, as many continue to favour the currency as a safe haven option.

Sterling fell broadly yesterday after data showed activity in the UK manufacturing sector shrinking in July for the first time in two years. The spike in risk aversion also weighed. The manufacturing PMI fell to 49.1 last month, down from 51.4 in June and well below consensus forecasts, reinforcing the dismal outlook for the UK economy. There are no UK data due for release today, leaving the GBP subject to general moves in market sentiment. The decision by the Reserve Bank of Australia to leave interest rates on hold saw the AUD come under selling pressure given some speculation that the central bank could have hiked rates. A policy tightening, however, does not seem that far way, with the RBA saying that it had considered an interest rate increase but took into account the uncertainty in global markets.

Looking at price movement today the Pound struck a two-month high against the euro this morning on renewed worries about euro zone peripheral debt, but failed to advance against the dollar ahead of UK construction activity data which risks undermining the pound. A weaker-than-expected reading could confirm the picture of sluggish UK growth suggested by weak manufacturing data on Monday. The euro fell to a two-month low of 86.99 pence while against the dollar, sterling was last down 0.1 percent at $1.6274 . It had retreated from a two-month high of $1.6477 on Monday after data showed manufacturing PMI shrank for the first time in two years. Analysts said the euro’s falls were due to renewed fears over the euro zone periphery’s debt burden as focus shifted from the U.S. debt crisis after U.S. lawmakers clinched a last-minute deal to lift the debt ceiling. The single currency fell to a low last seen on May 31, although traders cited decent-sized corporate bids around 87.00 pence and many market players said the pound looked over-stretched.