Profit-taking on the overnight risk aversion trade has lifted EUR/USD and EUR/JPY this morning.  The big story of the session remains Obama's imposition of a new 35% duty on Chinese tyres and the possibility of retaliation from China.  Chinese officials have threatened to re-examine duties on US auto and chicken products.  With threats of complaints to the WTO already emerging on both sides and given the proximity of the G-10 summit in Pittsburgh later this month, this topic looks set to remain in the headlines for some time.   

The rise in protectionism demands is a function of recession but a disaster waiting to happen if politicians move further down this route.  For now the uncertainties associated with protectionism could place a cap on the recent move lower by the USD.  However, with short-term interest rate spreads weighing on the USD relative to other major currencies such as the EUR, the dollar is being seen as a funding currency.  This suggests scope for a sharp USD rebound is also unlikely in the absence of a shock to the global outlook. 

In early European trading EUR/USD found support at 1.4520 though its push higher has now run out of steam. A move back below 1.4500 would negative last week's push higher and could put EUR/USD back into its summer trading range.   EUR/JPY found support 131.40 but remains below Friday's close.  Japanese July industrial production was confirmed overnight at -22.7% y/y, though this is consistent with signs of stabilisation in the sector  the strength of the JPY will not be facilitating an easy return to growth.    

There was no UK economic data released this morning.  Cable maintained its downtrend this morning, though it remains essentially range bound.  EUR/GBP bounced from Fridays' lower levels though gains have fallen short of the 0.8800 level.  While the pound found solace last week in the better than expected production data and in the BoE's decision to leave rates unchanged, the outlook for the pound is still hindered by the perception that the UK economic recovery is lagging that of the Eurozone and by the worrying growth in the budget deficit this year.  UK PSNCR data due Friday are unlikely to bring good news for the pound. 

The NZD was hit hard last night on the release of worse than expected retail sales data (July -0.5% m/m). The move in the NZD was exaggerated by the overnight move away from risk.

This afternoon there is no US data due, Canadian Q2 capacity utilisation will be posted.