The greenback relinquished some of its gains versus the euro and yen, falling to 1.5752 and 106.64 by the New York afternoon. Last week's payrolls report, while disappointing, was largely in line with expectations and tempered fears that the non-farm payrolls figure would reflect a similar amount of job losses as seen in the ADP private sector report. The US economic calendar this week is light, consisting of May pending home sales, weekly jobless claims, trade balance, and the July University of Michigan consumer confidence survey.

San Francisco Fed President Yellen offered a mixed outlook on the economy, but provided a more hawkish assessment on the direction of interest rates. She would categorize current policy as "quite accommodative" with the Fed funds rate quite low by historical standards. Yellen said that the extreme downside risks for the US economy have been mitigated somewhat and has been somewhat reassured by recent data. She said that Fed policy is nearing a crossroads and faces competing risks on growth and inflation. Yellen stressed that risks to inflation have definitely increased and headline inflation is expected to stay much higher than desired over the next few quarters.

Fed speakers will dominate the headlines this week, with Chairman Bernanke and Richmond Fed Governor Lacker slated to speak tomorrow. Despite Lacker issuing hawkish commentary in recent months, the sole dissenter voting for a rate hike at the FOMC's June meeting was Dallas Fed President Fisher. Traders will closely on the comments from both Bernanke and Lacker for hints on whether the Fed will tighten policy as early as August. Given the persistent weakness in both the labor and housing market, we do not anticipate a Fed shift toward a tightening policy until Q4, at which point we look for only a 25-basis point hike.

Pound Eases on Data

The sterling fell against the greenback to 1.9646, its lowest level in two-weeks on the heels of softer than expected UK economic data. May industrial output posted a larger than forecast decline at -0.8% versus the previous month at 0.2% and -1.6% compared with 0.2% a year earlier. Manufacturing output declined by 0.5%, down from a 0.1% increase in April while falling by 0.8% versus 0.1% a year earlier.

The key highlight from the UK this week will be the Bank of England's policy announcement on Thursday morning. The BoE is not expected to change policy given the current dilemma facing the Bank, with the UK economy plagued by persistently high inflation and soft growth prospects.