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• Australian Dollar Dominates as GDP Adds to Evidence RBA May Be First Major Central Bank to Hike Rates
• Euro Outlook Hinges on ECB President Trichet's Comments, Forecasts
• British Pound Gains Slightly as UK Construction PMI Improves

US Dollar Edges Lower as Consolidation Continues, FOMC Minutes Show Few Surprises
The US dollar remains in consolidation mode against most of the majors, though the currency did experience a clear decline. Ultimately, though, the DXY index remains above rising trendline support drawn from the July 2008 lows, keeping the greenback's uptrend intact. In economic news, leading indicators for this Friday's release of US non-farm payrolls have generally suggested that the pace of job losses slowed further during August. Yesterday, data showed that the ISM manufacturing employment component rose to 46.4 in August from 45.6, and while this is below 50, the point of neutrality, the index hit a one-year high. Today we learned that the ADP employment change fell by 298,000 in August, which was worse than expected but the smallest decline since September 2008, while Challenger, Gray & Christmas Inc. said that their measure of job cuts fell by 13.8 percent from a year ago to 76,456, the steepest decline since February 2008. Meanwhile, other data showed that US factory orders rose for the fourth straight month in July at a rate of 1.3 percent, the biggest increase since June 2008. However, a breakdown shows that this was due entirely to a surge in aircraft orders and excluding transportation, the index actually fell 0.7 percent.

The markets didn't show much of a reaction to the release of the minutes from the Federal Reserve's policy meeting on August 11-12, which indicated that the Federal Open Market Committee (FOMC) discussed trimming MBS and agency purchases, though they made no decision on the matter at the time. This would be in line with their previously announced shift to gradually slow the pace of the FOMC's purchases of $300 billion of Treasury securities through the end of October, and signals that the central bank is trying to find ways to put an end to their liquidity facilities. The minutes also showed that some FOMC members expected recovery to pick up in 2010, though there is considerable uncertainty on the strength of the recovery. Furthermore, most FOMC members thought that inflation should be subdued in the next few years, though some saw a risk of substantial disinflation.

On Thursday, ISM non-manufacturing is anticipated to rise to an 11-month high of 48.0 for the month of August from 46.4. While stronger readings are always a positive, anything below 50 will continue to signal a further contraction in activity and will ultimately highlight the lack of consumer spending growth in the US. As it stands, the only strong point in the US at this time is the manufacturing sector, and even growth there may start to pullback now that the cash for clunkers program has formally ended as of August 24.

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Australian Dollar Dominates as GDP Adds to Evidence RBA May Be First Major Central Bank to Hike Rates

The Australian dollar was the strongest of the majors on Wednesday, rallying more than 1 percent against the New Zealand dollar, Canadian dollar, and US dollar as evidence continues to mount that the Reserve Bank of Australia may be one of the first major central banks to raise rates. Indeed, Credit Suisse overnight index swaps have shifted to price in a 45 percent chance of a 25 basis point hike by the RBA at their next meeting, up from a 10 percent chance on Monday, after RBA Governor Glenn Stevens said in his monetary policy statement that Australian economic conditions have been stronger than expected. Proof of this came from the surprisingly strong release of Q2 GDP overnight, which rose by the most in more than a year at a rate of 0.6 percent. Overall, consumers and businesses alike appear to be faring well in the currency economic environment as household consumption rose by 0.8 percent, the most since Q4 2007, while gross fixed capital formation increased by 0.7 percent, the first positive reading since Q3 2008. That said, AUDJPY wasn't able to gain much traction

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Euro Outlook Hinges on ECB President Trichet's Comments, Forecasts

The euro was mixed against the majors on Wednesday, but did gain against the US dollar as EURUSD rose for a test of former trendline support at 1.4300. Economic news for the Euro-zone was generally positive, as preliminary Q2 reports showed that GDP fell 0.1 percent from the previous quarter, and dropped 4.7 percent from a year ago. The optimistic part was that household consumption rose 0.2 percent, the first increase since Q1 2008, but on the other hand, gross fixed capital formation tumbled for the fifth straight quarter, this time by 1.3 percent. On Thursday, the European Central Bank is anticipated to leave rates unchanged at 1.00 percent at 7:45 ET. Where the currency ends the day, though, may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Traders will likely focus on any comments regarding the future of interest rates in the region, including whether 1 percent should be considered the floor. That said, the ECB will also be announcing new economic outlooks for the Euro-zone, and if we see any sort of revisions, the euro will likely act accordingly.

British Pound Gains Slightly as UK Construction PMI Improves

The British pound held its ground on Wednesday, but GBPUSD and GBPJPY both remain below key resistance levels near 1.6350 and 152.00, respectively. There was little in the way of UK economic news, as construction PMI rose in line with expectations to 47.7 in August from 47.0, indicating that the contraction of the sector continues, albeit at a slower pace. Data could be a bit better for the currency on Thursday, as PMI services is projected to rise to 54.0 in August from 53.2, which would signal the fourth straight month of increased business activity in the service sector. All told, such news would be supportive of claims that the economy may have started to emerge from recession in Q3, though Tuesday's drop in manufacturing PMI to 49.7 from 50.2 essentially claims the opposite.

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Written by: Terri Belkas, Currency Strategist for