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The EUR/USD advanced for the second day to reach a high of 1.4315 during the European trade and remained bid throughout the session despite the unexpected fall in retail sales.

Talking Points
• Japanese Yen:
• Pound: Services PMI Expands for Fourth Month
• Euro: Retail Spending Unexpectedly Falters, All Eyes on ECB
• US Dollar: ISM Non-Manufacturing on Tap

The EUR/USD advanced for the second day to reach a high of 1.4315 during the European trade and remained bid throughout the session despite the unexpected fall in retail sales. Nevertheless, a Bloomberg News survey shows all of the 58 economists polled forecast the European Central Bank to hold the benchmark interest rate at 1.00% later today and is widely expected to adjust their growth forecast at this month's meeting, and the euro is likely to hold a narrow range over the next hour of trade as the markets await for the policy statement due out at 11:45 GMT.

Retail spending in the Euro-Zone slipped 0.2% in July amid expectations for a 0.1% rise, while the annual rate of consumption fell 1.8% from the previous year versus forecasts for a 2.2% decline. The breakdown of the report showed discretionary spending on food and drinks dropped 0.5% from the previous month, while demands for non-food products held flat during the month. Moreover, the economic docket showed service-based activity fell at a slower pace in August, with Markit Economists revising the PMI reading to 49.9 from 49.5, while the composite reading increased to 50.4 from an initial reading of 50.0. As the outlook for future growth remains highly uncertain, the ECB may continue to hold a dovish outlook for inflation throughout the second-half of the year as President Trichet see a risk for a slower recovery, and commentary following the rate decision is likely to stoke increased volatility in the euro cross rates as investors weigh the outlook for future policy.

Cable pushed higher day against the euro and the greenback for the second day, and the British pound may continue to retrace the sell-off from the previous month as the economic outlook improves. Service-based activity in the U.K. expanded for the fourth consecutive month in August, with the PMI reading advancing to 54.1 from 53.2 in July, and the data encourages an improved outlook for future growth as services accounts for more than two-thirds of the economy. The breakdown of the report showed business expectations increased to 72.3 from 69.3 in the previous month, and firms are likely to ramp up expectations for an economic recovery as the Bank of England pledges GBP 175B in asset purchases to ease the flow of credit. As the economic docket for the U.K. lacks market-moving potential, risk trends are likely to dictate price action for the British pound over the next 24-hours of trading, and the rise in risk appetite may lead the GBP/USD to cross back above the 20-Day moving average at 1.6418 as we head into the U.S. session.

The U.S. dollar weakened for the second day following the rebound in market sentiment, but advanced against the Japanese yen to halt the three-day decline. As risk trends continue to drive price action in the currency market, the rise in equity futures foreshadows a higher open for the U.S. market, and the reserve currency may continue to lose ground over the next few hours of trading as investors move into higher yielding assets. Nevertheless, service-based activity in the U.S. is expected to fall at a slower pace in August, with economists forecasting the ISM index to rise to 48.0 from 46.4 in July, while initial and continuing claims for unemployment benefits are anticipated to fall to 565K and 6125K from 570K and 6133K, respectively. As growth prospects improve, the rise in the fundamental outlook could stoke increased demands for the greenback as investors anticipate the Federal Reserve to tighten policy over the next 12-months.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com