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The interest rate decision from the Bank of England highlights the economic calendar in European hours, though any meaningful change in monetary policy seems unlikely this time around. German inflation and current account figures are also on tap.

Key Overnight Developments

• Australian Economy Sheds 21.4K Jobs, Unemployment Rate Rises
• US Dollar Retraces Lower as Stocks Tread Water in Asian Trading


Critical Levels

7-9-09

The Euro edged higher in overnight trading, retesting the 1.39 level. The British Pound followed suit, adding as much as -0.5% against the US Dollar. The greenback's weakness seemed to be corrective after strong gains in NY-session trading and came in line with muted trading on Asian stock exchanges.


Asia Session Highlights

Australia's economy shed 21,400 jobs in June, the most in a year, sending the Unemployment Rate to 5.8%, the highest since October 2003. Employers cut -21.9k full-positions while filling just 0.4k part-time vacancies. Continued labor market weakness is likely going forward as lackluster global demand weighs on sales of coal and iron ore, Australia's top export commodities. Job losses will discourage consumption and hold back overall economic growth, bolstering economists' expectations that GDP will shrink -0.5% in the second quarter after unexpectedly expanding in the three months to March. Although consumer confidence jumped to the highest level in 19 months in July according to Westpac Banking Corp, the improvement likely owed to the hefty A$12 billion fiscal stimulus package and sentiment could fall off sharply as the flow of government cash dries up. The Reserve Bank of Australia kept interest rates unchanged at 3% earlier this week but Governor Glenn Stevens noted that there is still scope for further easing of monetary policy as weakening demand for labor drives wages lower and puts downward pressure inflation.

Related Article: Australian Consumer Inflation Expectations Jump to 7-Month High


Euro Session: What to Expect

The interest rate decision from the Bank of England highlights the economic calendar in European hours, with all 54 economists surveyed by Bloomberg expecting the bank to keep borrowing costs unchanged at 0.50%. Overnight index swaps suggest the market consensus is in agreement, with traders pricing in virtually no chance of a change in the benchmark rate. An expansion of the current 125 billion pound quantitative easing program also seems unlikely for the time being considering early signs of stabilization in leading economic indicators that have emerged over recent weeks. Most recently, London-based think tank NIESR reported the economy probably shrank -0.4% in the second quarter, the slowest pace of decline in a year, while consumer confidence rose to the highest level since October 2008 in June. Still, the British Chamber of Commerce has urged policymakers to expand their asset-buying scheme by 25 billion pounds, saying a recovery is not guaranteed; the call for further easing has been echoed by the Shadow Monetary Policy Committee, a group of independent economists that meet at the Institute of Economic Affairs. For his part, BOE chief Mervyn King has said that the return to economic expansion will be a long, hard slog. On balance, current GDP projections suggest UK GDP growth will trail that of the US by 0.9% but outpace the Euro Zone by 0.35% on average through the end of 2010, suggesting the BOE will follow the Fed but lead the ECB in raising interest rates as the current turmoil abates, implying a bearish long-term bias for both GBPUSD and EURGBP.

The final revision of Germany's Consumer Price Index is expected to show that the annual inflation rate came to a standstill in June. Leading indicators point to continued weakness ahead: producer prices have fallen to the lowest in over two decades, foreshadowing lower consumer prices ahead as lower wholesale costs are reflected in the final price tag. This suggests inflation is set to dip into negative territory in coming months, threatening the Euro Zone's largest economy with the onset of deflation. Such a development is all but certain to take the currency bloc as a whole along the same trajectory, threatening to commit the region to long-term stagnation as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.

Separately, Germany's Trade Balance surplus is set to shrink 9.0 billion euro from 9.4 billion in the previous month. The broader Current Account surplus which includes cross-border capital flows as well trade in goods and services is set to narrow to 3.7 billion euro, the lowest in fourth months. A survey of economists conducted by Bloomberg calls for the external sector to contribute just 3.1% to overall economic growth this year, the lowest in five years, as lackluster global demand continues to weigh on overseas sales of German products. Indeed, exports are expected to add just 1.5% in May after falling by a whopping -5.0% in the previous month, putting overall outbound volumes at the lowest level since May 2005.

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