Foreign exchange markets have lacked strong direction in European hours. Following strong gains for the USD in Friday's post payrolls environment, profit-taking emerged in Asian hours with EUR/USD climbing back towards the 1.4220 area. USD buyers managed to regain the upper hand in London with EUR/USD creeping back to a low around 1.4180. A similar pattern has been seen in USD/JPY with USD buying in Europe pushing it from its overnight lows back towards 97.50.

The better than expected payrolls report last Friday has strengthened the view that the US economy is emerging from recession. In recent months good growth news has weighed on the USD as the market moved out of safe haven USD longs. The ability of the USD to gain on Friday's better economic news last week strengthens the long standing argument of many USD bulls that the US may benefit from a positive growth differential as we approach the final quarter of the year. As yet, it is too early to tell whether the USD's reaction to positive economic data has changed course. This week's releases of US retail sales, industrial production and of course the FOMC will provide further clues. Technically, EUR/USD remains in a medium-term uptrend and would have to move closer towards 1.4000 to change this bias.

Sterling is lower across the board this morning. The BoE's Quarterly Inflation Report on Aug 12 will be a key focus. Following the Bank's decision to extend QE by a greater amount than expected last week, the market is expecting the BoE to announce a fair degree of gloom on Wednesday. While no key UK data were released this morning, BRC figures, trade numbers and jobless data are all due ahead of the Inflation Report and these could alter the market's mood. In view of the fact that recent UK data have been stronger than expected (PMI data suggest expansion in July in both services and manufacturing data) and given the soft tone of sterling at present, room for negative sterling shocks from the BoE this week may be limited. That said, the outlook for cable is complicated by the current battle between USD bulls and bears. EUR/GBP is finding support in the 161.80 area this morning EUR/GBP ran into selling around 0.8540.

The AUD and the NZD both posted decent gains in Asian hours on the back of a positive performance in regional equity markets and strong Japanese machine orders a (+9.7% m/m in Jun). Following a quiet open in Europe, upside momentum is again building into the US open.

There are no key US or Canadian economic data this afternoon