EUR/USD has traded sideways in European hours after the USD received a boost in Asian hours from comments from the Fed's Bernanke. The Fed Governor did little more but to state the obvious â€ that he would be ready to tighten policy when the economy improves to prevent the emergence of an inflation problem down the road. But the very fact that he is considering the timing of the first rate hike was enough to excite the fx market into covering short USD positions. His comments were given added momentum by those of White House Economic Advisor Larry Summer who repeated the Treasury's commitment to its strong USD policy. That said, the inability of the USD to maintain its upside momentum against the EUR during European hours reflects the fact that there has been no real change in the fundamental backdrop from yesterday. While it is likely that the next Fed move will be a hike, it is possible that this may not be before Q3 next year.
Gold, oil and other USD denominated commodities have fallen on the back of the stronger USD with this week's rallies making them ripe for profit-taking. Weakness in the JPY vs the USD initially extended into early European hours though USD/JPY ran into resistance in the 89.40 area before the JPY began to stage a fairly aggressive pullback.
Cable has suffered more negative pressure; finding support at USD1.5940. EUR/GBP coincidentally rose towards the 0.9240 level despite firmer than expected UK PPI data and a narrowing in the Aug trade balance. In spite of expectations for a negative number, PPI output turned positive on the year rising 0.4% y/y. The biggest impact on the PPI came from petroleum products which is likely to have a similar effect in preventing the CPI index dropping sharply from its present 1.6% y/y. Overall, UK inflation is still relatively low. However, these data should help support the pound in the medium-term. The relatively stronger inflation data in the UK may see the BoE having to raise rates at a more aggressive pace compared with the Fed and the ECB, though rates may not be headed higher until the middle of next year. The UK August trade deficit narrowed to GBP6.2 bln from GBP6.4bln the previous month. Even though this is the smallest deficit since 2006 it also failed to support the pound. Concerns over the UK's poor fiscal position and lack of growth continue to undermine the pound. Yesterday's pledge from Tory party Cameron to restore health to the country's finances failed to benefit the pound since his coincident appeals to stop 'printing money' gave rise to fears that his policies may destabilise the economic recovery.
EUR/NOK plunged in early London hours on the back of stronger than expected Norwegian CPI (core +1.1% m/m), which has underpinned the risk of a near-term Norges Bank rate hike. EUR/NOK reached a low of 8.2978 before finding buyers.
Canadian employment data this afternoon may be key in anchoring expectations with respect to the next BoC policy move. Both US and Canadian August trade data are also due for release.