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• Euro Ends Week Just Above 1.4700 as German Trade Surplus Narrows
• British Pound Down Despite Improvement in UK Trade Deficit, Rise in Producer Prices
• Canadian Dollar Dominates as Economy Adds on 36,000 Jobs and Unemployment Rate Falls to 8.4%

US Dollar Gains Following Bernanke Comments, Unexpected Narrowing of US Trade Deficit
The US dollar was one of the strongest major currencies on Friday, following mildly hawkish comments from Federal Reserve Chairman Ben Bernanke on Thursday and the release of US data at 8:30 ET. Yesterday, Bernanke said that the central bank will be prepared to tighten monetary policy when the outlook for the economy has improved sufficiently and to prevent the emergence of an inflation problem down the road. However, he also said that he and his colleagues at the Federal Reserve believe that accommodative policies will likely be warranted for an extended period. Meanwhile, the US trade deficit for the month of August unexpectedly narrowed to $30.71 billion from $31.85 billion thanks to a 0.2 percent rise in exports and 0.6 percent drop in imports.

Looking ahead to next week, event risk won't really pick up until Wednesday morning, when the Commerce Department is forecasted to report that US retail sales slumped 2.1 percent in September, after jumping by the most since January 2006 in August at a rate of 2.7 percent. The decline is likely to be due primarily to a drop in auto sales relative to recent months. For example, spending on motor vehicles and parts rocketed 10.6 percent higher in August as the cash for clunkers program came to an end, and demand is likely to have fallen without the government-sponsored incentive.

Then, on Wednesday afternoon, the minutes from the Federal Reserve's last meeting on September 22-23 will be released. Following that meeting, the policy statement initially led the US dollar to sell-off against the most popular currencies as the central bank maintained a neutral tone and repeated that they would keep rates exceptionally low for an extended period. However, the currency subsequently bounced back as the overall sentiment of the statement was optimistic, with the FOMC saying that economic activity had picked up while conditions in the financial markets have improved further. Based on Bernanke's recent commentary, traders will likely be looking for additional signs of when the central bank will start raising rates.

Related Article: US Dollar Faces Lineup of Major Event Risk from US Retail Sales, FOMC Minutes

Euro Ends Week Just Above 1.4700 as German Trade Surplus Narrows
The euro saw a mixed day of trading on Friday, gaining against the Japanese yen and British pound but falling versus the Canadian dollar and US dollar. The moves come a day after the European Central Bank's monthly meeting, in which the monetary policy committee left rates unchanged at 1 percent as excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. Evidence of the impact of the euro's appreciation came in the form of the trade surplus, which narrowed more than anticipated to 8.1 billion euros in August from a revised 14.1 billion euros, as exports fell for the first time in four months by 1.8 percent. The data adds to evidence that the outlook for the trade-dependent economy is still fragile as exchange rates and weak growth through the rest of Europe, the UK, and the US puts their own growth at risk.

British Pound Down Despite Improvement in UK Trade Deficit, Rise in Producer Prices
The British pound took a heavy hit once again on Friday despite mostly positive data. The UK's visible trade deficit fell to the lowest level in more than three years, narrowing to 6.24 billion pounds in August from 6.431 billion in July, but the shift had more to do with a drop in imports, as exports also fell, indicating the demand remains weak both domestically and abroad. Meanwhile, the producer price index (PPI) that measures input prices slumped 0.5 percent in September, but a 0.5 percent increase in PPI output suggests that businesses have a bit more pricing power these days and may be able to make up for some lost profit margins. Furthermore, the data creates some potential for surprising strong results for the consumer price index (CPI) next week.

Next Tuesday at 4:30 ET, the CPI reading for the month of September is expected to rise 0.3 percent, but the more important part of this report is that the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to fall to 1.3 percent, the lowest since October 2004, from 1.6 percent, keeping inflation within the central bank's acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further before year-end. On the other hand, if CPI holds strong as PPI suggests, the currency could rally in response.

Canadian Dollar Dominates as Economy Adds on 36,000 Jobs and Unemployment Rate Falls to 8.4%

The Canadian dollar was easily the strongest currency of the day, rallying more than 2 percent against the British pound and Japanese yen, as data from the nation was broadly better-than-expected. The Canadian net employment change rose significantly more than projected in September, reflecting a net gain of 36,000 jobs that brought the unemployment rate down to 8.4 percent from 8.7 percent. A breakdown of the report showed a surge in goods-producing, full-time positions, creating some upside potential for consumption in coming months. Likewise, the Bank of Canada's survey of business executives showed that they were more optimistic on conditions over the next year in Q3, as 69 percent said they expected growth to quicken, while 16 percent expected it to slow. Likewise, the Senior Loan Officer Survey (SLOS) showed that, on balance, there was a further tightening in lending conditions, but it was the lowest since the start of the global financial crisis. On the other hand, the Canadian trade balance fell further to a record low of -C$1.985 billion in August from -C$1.316 billion as exports to the US slumped 3.2 percent while shipments to the European Union contracted by 6.6 percent, suggesting demand in the regions remains lackluster.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com