•          USD weaker following CPI data report

•          JPY slightly higher but remains pressured ahead of the upper house election

•          Commodity currencies strengthens with focus on the central bank decisions

USD - The dollar pared its losses against the euro and yen after the release of consumer price data.  Although consumer prices rose much more than expected in June, the primary driver was a jump in gasoline prices.  The Consumer Price Index increased 0.5%, the largest increase since February, after nudging up 0.1% in May, while gasoline prices accounted for about two-thirds of the increase.  Stripping out volatile energy and food, consumer prices only increased 0.2 percent for a second straight month. The increase could help support expectations that the Fed will start scaling back its massive monetary stimulus later this year. The market will turn its attention to Bernanke’s testimony before Congress tomorrow and Thursday, where he is expected to reiterate his previous remarks that US monetary policy will remain accommodative; however, the market will be looking for any clarification in regards to the timing of the reduction in the stimulus plan.  Look for the dollar to regain its footing ahead of the testimony.   

EUR – The euro is up 0.5% against the dollar after mixed results from the release of the ZEW economic survey. The eurozone figures overall printed a bit better climbing to 32.8 from 30.6 and exceeding forecasts for a reading of 31.8.  German ZEW disappointed coming in at 36.3 in July from 38.5 in June, missing the consensus of 39.6. The market will turn its attention to political instability in Europe with Spain’s Prime Minister facing corruption charges over text messages with Luis Barcenas, who is under investigation for fraud. In Italy, the Interior Minister is under fire regarding a deportation decision and Silvio Berlusconi is still dealing with tax evasion charges. 

GBP – Sterling held its ground against the dollar despite the release of weaker than expected UK inflation data.  The UK’s CPI dropped 0.2% m/m pushing the headline to 2.9% y/y, with core inflation coming in at 2.3%.  With inflation below 3%, look for the BoE to remain dovish in its policy stance.  BoE’s Paul Fisher stated that eventually a tighter monetary policy will be put in place, though they are years away from that.  He did hint, however, that the BoE could adopt a stronger forward guidance in August as Fisher stated that he expects volatility to continue with the US scaling back its stimulus program.  

JPY – The yen gained 0.6% to a session high of 99.23 on the interbank market from yesterday’s close of 99.85. Despite its gain, it could be short-lived as the yen faces pressure throughout the end of the week where the upper house election will hand Prime Minister Shinzo Abe a big victory, allowing him more freedom to push forward with his agenda to revive Japan’s economy.  In addition, economic slowdown in China and other Asian countries may contribute to further yen losses as 40% of Japan’s exports go to emerging markets, with China alone accounting for 20%. This could put pressure on Japan’s economy and may trigger a larger stimulus plan from the BoJ.

Commodity Currencies – CAD is up 0.1% against the USD but underperforming on all the crosses. Canadian factory sales in May rose by 0.7% from April, making up some of the ground they lost during a plunge the previous month. However, sales in Canada continue to struggle and are well off their 2008 highs. The key focus will be over tomorrow’s BoC meeting, as Governor Poloz plans to make his first announcement on the economy and interest rate environment. However, rates are widely expected to remain on hold at 1.0% as inflation is low and falling and household debt has shown signs of stabilizing. AUD is up 1.5% against the USD, after the RBA made a strong connection between the outlook for policy and the level of AUD, despite some suggestion of further easing. The minutes highlighted that the recent AUD weakness and monetary stimulus in place leaves the current policy suitable for sustaining growth in the economy.

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