FX markets continue with their choppy, noncommittal trading pattern. But as investors concerns ease and EU spreads tighten significantly, markets are leaning towards selling USD (interestingly not case with other safe-have FX trades like JPY and CHF) and buying of risky assets. But given that summer trading pattern is in full effect, we are seeing a variety of small time news events having a distortional effect on prices. Case in point, St Louis Fed President Bullard's comments that linked the US inflation path with that of a Japanese-style deflationary outcome within the next several years, advocating the possible need for the expansion of Treasury purchases.

Given the Fed presidents more hawkish reputation, the north pole of inflation hawks, he was once quoted saying, (and lack of news flow) the market jumped on the statement. However, this deflationary argument has been well vetted and is currently the flavor of the month, so its not truly original. In addition, he goes on to say that no further easing will be needed and the fed is prepared to fight a negative shift in price pressures.

Less covered was Dallas Fed President Fisher comments that he believed that deflation was only a tail risk and that further monetary policy easing would be not be required. When asked it the Fed would partake in monetizing the US huge fiscal debt he stated, We know what happens when central banks give in to those requests - it leads us down the slippery slope of debasing our currency and puts us on the path of hyperinflation and economic destruction.

But in actuality none of these comments and ideas should be surprising to participants, and the market shouldn't try too hard to dissect subtle divergence in opinions (especially in Fishers case to a group of Texans). The Fed is clearly cautious and uncertain over growth (highlighted in recent economic data and beige book) and the lack of confidence will come out in statements. While the USD will react, we suspect that the FX effect will be short lived and that there will be opportunities to trade against the tide.

In our mind, yesterdays CHF trading pattern is one to watch. Starting in the European session, markets were buzzing with reports that the SNB was unwinding part of their massive reserve. And combined with the announcement that the Swiss central bank would begin to mop up excess liquidity, it has raised the probability of a near term policy shift. We believe the CHF will be a triple threat, with gains from widening interest rate differentials (suspect an early fall hike), reserve selling and health fundamentals, all giving the CHF a lift. Watch for the EURCHF to trend lower.

In Japan , a steady stream of direct comments at the JPY resurgence hit the wires. FM Noda stepped into the fray stating that he's watching FX moves carefully (a Yen boilerplate statement) while Vice-FM Ikeda later followed up to say: I will not comment on levels but generally speaking, I'm worried about the impact it may have on Japanese exporters, which have been a driving force (for the economy).

Headline Japanese CPI fell to -0.7% vs. -0.9% prior for the 17th consecutive month (although at a slower pace) and Industrial Production also slumped. We suspect that policy makers will overlook the slight shift in pace of decline and will still look towards monetary policy easing, as an viable escape mechanism. That said we are strong buyers of EURJPY and USDJPY at these levels, as we suspect that Japanese policy makers will proved a backstop.

As for today the US GDP will be the highlight of the day. As with deflation, Double Dip predictions are back in fashion and a weak number (supported by soft economic reading recently) will only exacerbate the theory and kill the USD. Forex-Chart

Today's Key Issues (time in GMT): 00:00 SEK Russia Interest rate announcement, % 7.75 exp/prior 07:30 SEK May labor cost index. 07:30 EUR Q2 GDP, +1.0% q/q, +3.3% y/y; last +1.4%, +3.0%. 08:00 EUR ITA Jun PPI, +0.2% m/m, +3.4% y/y eyed; last +0.5%, +3.6%. 09:00 EUR Jul HICP - flash, +1.7% y/y eyed; last +1.4%. 09:00 EUR Jun unemployment, 10.0% eyed; last 10.0%. 09:00 EUR ITA Jul CPI - prelim, +0.2% m/m, +1.5% y/y eyed; last unch, +1.3%. 09:00 CHF ITA Jul HICP - prelim, -0.9% m/m, +1.8% y/y eyed; last +0.1%, +1.5%. 09:30 EUR Jul KOF sentiment indicator, 2.30 eyed; last 2.25. 10:00 USD ITA Jun unemployment, 8.8% eyed; last 8.7%. 11:00 USD St Louis Fed Bullard on CNBC. 12:30 USD Q2 GDP - advance, +2.3% AR eyed; last +2.7%. 12:30 USD Real PCE, % q/q saar 12:30 USD Q2 core PCE price index, +1.0% AR eyed; last +0.7%. 13:45 USD Chicago PMI 13:55 USD University of Michigan consumer sentiment index