After a pretty decent run, we're seeing a slight pullback in risk-correlated trades this morning. The pullback shouldn't last long, as it seems to be more of a natural short-term correction ahead of the big events later this week. With the 2 major European central bank decisions coming around and Friday's NFPs in the US, global equity markets are flat and taking a wait and see approach.

The US Dollar continues to be hurt by speculation that the Fed will introduce some form of QE or purchase additional mortgages. The potential expansion of the Fed's balance sheet is causing significant USD weakness. As we suggested last week, the conditions will soon be right for the USD to resume its modern role as the primary funding currency for the world.

US rates aren't going higher anytime soon and with 10 yr yields below 3.00% - the widening interest rate differentials and declining volatility will make the trading environment ripe for a US dollar carry trade.

Today's big news is obviously going to the be the BoE and ECB. For the BoE, we basically expect it to be a non-event baring any deviation from the universal consensus that rates will be held where they are and that the asset-purchasing program will stay at £200 bn. The discussion about a possible shift toward tightening began with strong economic data, including the UK's whopper of a GDP number, but is rapidly fading as the housing market continues to weigh on the Union Jack. If you're looking to keep a bead on the Pound, keep an eye on the BoE's inflation report next week and the central bank's minutes coming out in 2 weeks.

Today's big news is obviously going to the be the BoE and ECB. For the BoE, we basically expect it to be a non-event baring any deviation from the universal consensus that rates will be held where they are and that the asset-purchasing program will stay at £200 bn. The discussion about a possible shift toward tightening began with strong economic data, including the UK's whopper of a GDP number, but is rapidly fading as the housing market continues to weigh on the Union Jack. If you're looking to keep a bead on the Pound, keep an eye on the BoE's inflation report next week and the central bank's minutes coming out in 2 weeks.

As for the ECB rate decision, it's also expected to be a bit of a no show. Although we don't expect a rate change, we might get to see some summer fireworks in the Q & A session afterwards. The press has been known to challenge Trichet from time to time and he's been known to lose his cool. His tone should be optimistic as recent EU data has been okay and the stress test was basically a success (based on the direction of equity markets and that EU sovereign spreads tightening). One button the press should push is asking Trichet his views on the relevance of the stress test and the divergence between the ECB estimate of €200 bn and the €3.5 bn reserve shortfall.

In Asia, the Yen continues to broadcast bullish signals to the growing dismay of policy markets. Japanese Minister of Finance Noda stated that recent moves have been somewhat one-sided and Trade Minister Naoshima attested that he was really concerned about the yen's recent rise...[and that]...Japanese corporations were facing huge currency risks. Naoshima went on to say something that actually caused a reaction in the USDJPY - we may need to take some sort of action in the future. As the USDJPY continues to trade below 89 and with our belief that US rates will stay compressed, we suspect rhetoric will be ratcheted up significantly. As we've stated in previous articles, we believe that Japanese policy makers are closer to intervention than the market believes.

Forex-Chart

Today's Key Issues (time in GMT):
07:00 EUR ESP Jun industrial output, +2.4% eyed; last +3.3%.
07:30 SEK Jun unemployment, 9.6% eyed; last 8.8%.
08:00 NOK May labor survey, 3.7% jobless eyed; last 3.7%.
10:00 EUR GER Jun industrial orders, +1.5% m/m eyed; last -0.5%
11:00 Czech: Interest rate announcement, % .75 exp/prior
11:00 GBP BoE MPC policy announcement, no changes eyed, policy rate target 0.5%.
11:45 EUR ECB policy announcement, no change in 1.0% refi target eyed.
12:30 EUR ECB Pres Trichet press conference
12:30 USD Initial jobless claims, thous (4wma)