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• Canadian Dollar Weakest of the Majors as Q2 GDP Drops 3.4%
• Australian Dollar May Show a Limited Reaction to RBA Rate Decision Overnight
• Euro, British Pound Remain Choppy but Make Few Decisive Moves

US Dollar Consolidation Continues as US Data Signals Strong ISM Manufacturing on Tuesday
The US dollar consolidation continues, and on Monday, the currency fell against many of the majors. As we've seen happen consistently over the past few days, just 30 minutes of price action - be it a sharp drop or rally - has determined where the greenback has ended the day relative to the rest of the majors. Indeed, it looks like low volume trading may persist through the rest of the week and until the US Labor Day holiday passes. That said, the DXY index has still managed to hold above a trendline drawn from the July 2008 lows, and this help to identify the US dollar trend in coming days.

Looking to the day's economic news, US manufacturing reports continue to reflect sharp improvements in the auto sector, which has been helped along by the US government's cash for clunkers program. First, the Chicago Purchasing Managers Index (PMI) jumped to a reading of 50 in August, the highest since September 2008. Now, 50 is the point of neutrality for the index, so the rise indicates that there was no change in business activity, but ultimately this is better than the steady contraction we've seen for the past ten months. Likewise, Milwaukee PMI jumped to 56 in August, the highest since January 2008, from 45 while the Dallas Fed index rose to -9.1 percent, the highest since November 2007, from -23.4 percent. That said, the cash for clunkers program formally ended on August 24, so it will be important to see if the rebound in the manufacturing sector can continue without the government stimulus.

On Tuesday, the ISM manufacturing index is projected to rise above 50 - the point of neutrality - for the first time since January 2008, which would add to evidence that the sector is experiencing a recovery in business activity on the back of the government's cash for clunkers program. Based on Monday's price action, the US dollar is still not responding to basic fundamental reports, as the currency generally fell lower on surprisingly strong US data. Nevertheless, traders should watch for increased volatility upon the release of the data.

Related Article: US Dollar, Euro, Commodity Dollars to Face NFPs, GDP, and Rate Decisions, Japanese Yen Weekly Trading Forecast

Canadian Dollar Weakest of the Majors as Q2 GDP Drops 3.4%

Though the bulk of the move came before Canadian data was even released, the Canadian dollar was the weakest of the majors on Monday as Canadian GDP was disappointing at Q2 -3.4 percent in Q2 compared to forecasts for a 3.0 percent drop. Even worse, Q1 GDP was revised down to -6.1 percent from -5.4 percent, marking the sharpest drop since record keeping began in 1961. According to Statistics Canada, increased purchases of motor vehicles pushed consumer spending higher, while a rebound in existing home sales provided a lift to the residential real estate market. On the downside, exports and business investment in machinery and equipment were both down, though not as sharply as in the first quarter. That said, with the Bank of Canada anticipating that growth will resume in Q3, the slight increase of 0.1 percent in June GDP appears to be a good start.

Australian Dollar May Show a Limited Reaction to RBA Rate Decision Overnight
The Reserve Bank of Australia (RBA) is anticipated to leave their cash rate target unchanged at 00:30 ET for the fifth straight month at 3.00 percent, and the Australian dollar may only respond to a biased monetary policy statement. As it stands, Credit Suisse Overnight Index Swaps (OIS) are pricing in 191 basis points worth of rate increases by the RBA over the next 12 months, compared to 112 basis points a month ago, as economic data has shown slight improvements and the central bank has taken a more hawkish stance. Indeed, the RBA's last policy statement dropped a line that said that the outlook for inflation allows some scope for further easing of monetary policy, suggesting that they have no intention of cutting rates any further. If the RBA doesn't bother to really change the statement, there may not be much of a market reaction, but if there are signs that the central bank is feeling more optimistic on the growth outlook, the Australian dollar could rally.

Related Article: Australian Dollar Weekly Trading Forecast

Euro, British Pound Remain Choppy but Make Few Decisive Moves

The euro and British pound remain fairly range bound across the majors and against each other, as the EURGBP pair spent the day between 0.8775-0.8825. There wasn't much in the way of major economic data, though Eurostat's flash estimate of Euro-zone CPI showed that the annual rate of growth rose to -0.2 percent in August from -0.6 percent. The move was generally in line with expectations and didn't have much of an impact on the euro as the European Central Bank has said in the past that they anticipate annual inflation rates will remain temporarily in negative territory before turning positive again later this year.

Meanwhile, both GBPUSD and GBPJPY remain below key resistance at 1.6350 and 153.50, respectively, after Friday's preliminary reading of Q2 UK GDP was revised up to -0.7 percent from -0.8 percent and the annual rate was revised to -5.5 percent from -5.6 percent, though this was still the worst annual decline since recordkeeping began in 1955. A breakdown of the report showed that revisions were due to manufacturing, energy extraction and wholesale and motor vehicle services, improvements that were partly the result of a government scrappage program that offered subsidies to consumers who traded in old cars for new ones. On the other hand, consumer spending and investment remained weak at -0.7 percent and -4.5 percent, respectively. While there are still major downside risks for growth in the UK, leading indicators for GDP like PMI services and PMI manufacturing have shown signs of expansion in July. Nevertheless, PMI readings above 50 for the months of August and September would be necessary to indicate a legitimate bounce.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com

E-mail: tbelkas@dailyfx.com