There has been a clear retrenchment of risk appetite this morning. This may be related to month end activity but is also likely a function of disappointing Japanese economic data overnight, dovish remarks from the Fed's Bullard and fears that this afternoon's US GDP release could further undermine optimism with respect to the strength of the US economy. Having pushed up to USD1.3090 early in the European session, the EUR has been toppled back below the 1.3000 level. USD/JPY has registered a fall to 86.20 while EUR/JPY is pushing below 112.20.

This afternoon's Q2 US GDP data is expected at 2.6% annualised, a little softer than the 2.7% rate registered in Q1. During May and June asset markets re-priced lower in accordance with expectations that the pace of the US recovery would be more moderate than had been expected. US Equity markets have since come off their lows in tune with the perception that fears of double dip recession in the US were overdone. Today's GDP data in addition to next week's US payrolls data will be crucial in setting the tone for the next few months. Following the comment s from the Fed's Bullard yesterday warning about the risk of deflation the USD will be particularly vulnerable to fears that the Fed may re-open the doors to QE if US data disappoint.

While Japanese data is still weak enough to suggest that the BoJ may ease further in the coming months, the tune of the ECB appears to be a little more confident. The ECB's bond purchases last week were the lowest since that policy commenced in May, Euribor has also ticked higher since the spring. Endorsing the slight change in ECB policy is recent stronger than expected German economic data and this morning's release of Eurozone CPI. Inflation rose to 1.7% y/y, in line with expectations but the highest rate since November 2008. The contrast between better Eurozone and patchy US data suggests that while retrenchment of risk appetite has taken EUR/USD lower today, the recent squeeze higher in EUR/USD may have further to run.

Cable has been hit hard this morning as risk has been taken off the table, though it is holding comfortably above key USD1.5450 technical support. The early release of weaker than expected UK GfK consumer confidence data also undermined the tone in the pound. Softening confidence suggests that the recent strength of retail sales may be about the run dry. Sterling has fared better vs the EUR on the back of broadbased EUR weakness, though EUR/USD has as yet failed to break below its recent 0.8315 low.

The CHF has continued to pull back ground vs the EUR this morning. While this morning's gains can be largely attributed to the move in the EUR, yesterday the gains in the Swissie were linked to speculation that the SNB could be hiking interest rates as soon as September. While the Swiss economy is performing relatively well and the SNB recently revised higher inflation expectations, CPI remains benign (+0.5% y/y in July). The strength of the CHF this year has tightened monetary conditions significantly and it is likely that the SNB will not hike rate until at least next year. If economic data in the US or Europe surprises on the upside and risk appetite sees another boost, EUR/CHF could be a good buy on dips.

The AUD/USD has been choppy but weaker today. Softer Japanese production data and weaker than expected domestic private sector credit data undermined confidence overnight. AUD/USD hit a session low just below 0.8970 in London hours.

In addition to US GDP, the US Employment cost index, Chicago PMI and University of Michigan confidence data are due.

Jane Foley

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