Comments from former Federal Reserve governor Greenspan at the weekend warning about the health of the US economy vocalised a widely held view that the pace of the US economy could be faltering.

The slowdown in US Q2 GDP from an upwardly revised 3.7 per cent q/q annualised in Q3 to 2.4 per cent is suggestive of the same theme.

This week the release of US July non-farm payrolls data may help clarify the economic outlook for the US. The market will be hoping for more solidity in the pace of increase of private sector payrolls. Without this, there is risk that the Fed could ease policy again.

While US economic data remains patchy, German economic data has been far better. This morning’s release of German July manufacturing PMI confirmed the flash estimate of 61.2. The strengthening in Germany’s production industries has now been sufficient to allow unemployment to decline for 13 consecutive months.

It has become increasingly difficult to ignore the improvement in Germany’s economic recovery and it will be interesting to see the response of European Central Bank (ECB) president Trichet to this following this week’s ECB’s August policy meeting.

The week before last the ECB bought the lowest amount of bonds since the bond buying programme started in May and Euribor has ticked higher since the spring; although it has moderated slightly in recent sessions.

While inflation is still relatively moderate at 1.7 per cent year-on-year it is at the highest level since the end of 2008. There is little chance of the ECB hiking interest rates until well into 2011.

However, there is presently a contrast between the ongoing policy normalisation at the ECB and the Fed’s decision to leave the door open to further easing. Although the medium-term outlook for the EUR is still clouded by the possibility that Greece could be forced to re-structure its debt, near-term, there may still be a squeeze higher in the EUR towards USD.13125.

Sterling has broken higher this morning. Cable has taken out the USD1.5650 level, EUR/GBP has blasted through the key EUR/GBP 0.8315 technical support.

While the growth of the UK economy in the spring was better than had been expected the consensus expects fiscal austerity to moderate growth potential in H2.

The July manufacturing PMI release showed a moderation in the pace of expansion to 57.3 from an upwardly revised 57.6 in June. However, this is still a decent performance and has been sufficient to push sterling a little higher.

Looking ahead, recent gains for the pound do make it more vulnerable to poor economic data, though given the consensus view that the economy will struggle in H2 the pound is still well positioned to perform well on strong data. The August Monetary Policy Committee meeting is likely to pass without event.