The US dollar was generally stronger across the majors on Wednesday, though economic data had little to do with the gains and the currency continues to simply consolidate.

Though there are US indicators scheduled for release on Thursday (Philly Fed, leading indicators), neither tends to be incredibly market-moving and as a result, the US dollar may not make any major directional moves until Friday. Why Friday? One word: Bernanke. On Friday at 10:00 EDT, Federal Reserve Chairman Ben Bernanke will speak on financial stability at the Kansas City Fed’s annual symposium in Jackson Hole, WY. His commentary tends to ignite major volatility for not only the greenback, but also for US Treasury and equity markets (and thus, the Japanese yen crosses). Given the uncertainty surrounding the health of US financial institutions, commentary on the financial markets will be watched closely and bearish sentiment by Mr. Bernanke could weigh heavily on risk-appetite. On the other hand, if Mr. Bernanke signals optimism that the US economy and financial sector can weather the storm, the US Dollar and risky assets, in general, could gain.

British Pound Drops On BOE Minutes - Buying Opportunity? Maybe Not.


The British pound tumbled lower for a test of 1.8550 this morning on the release of the minutes from the Bank of England’s most recent policy meeting. The BOE meeting minutes revealed a 7-1-1 vote to leave rates steady in August at 5.00 percent, with one dissent by Tim Besley in favor of a 25bp hike and one dissent by the ever-dovish David Blanchflower in favor of a 25bp cut. This was the same vote count that we saw in July, which helped to limit the impact of the release on the British pound. Looking at the details of the minutes, the Committee continues to harp upon inflation, and with CPI well above their 2 percent target at 4.4 percent this is not entirely surprising. However, they are clearly concerned about growth as well, and with the Committee saying that their main questions were “the likely degree of persistence in inflation and how much spare capacity would be needed to offset that persistence,” it appears the BOE will seek to leave rates steady, rather than raise rates.

Indeed, with the 5 percent Bank Rate already weighing on economic expansion, they are hoping that the slowdown will be enough to bring price pressures down on its own, and until CPI starts to fall lower, the BOE is unlikely to make monetary policy more accommodative. While overnight index swaps may be pricing in over 75bps worth of rate cuts within the next 12 months, these moves may not occur until 2009. As a result, there are still opportunities for the British pound to gain, but with the latest FXCM SSI numbers showing that traders are buying up GBP/USD (long positions are up 15.5 percent from yesterday), the contrarian indicator suggests the pair could continue lower. Furthermore, upcoming event risk is anticipated to work in favor of GBP/USD bears since UK retail sales for the month of July are forecasted to slump 0.2 percent, dragging the annual rate down to a more than 2-year low of 1.8 percent. As I mentioned in my forex forecast for the top 5 indicators of the week, the data would be in line with the British Retail Consortium’s (BRC) July survey, which indicated that consumers tightened their purse strings and led same-store sales to tumble 0.9 percent from last year. Furthermore, labor market conditions have started to deteriorate as jobless claims have risen during the past six months, suggesting that consumption growth peaked long ago.

Canadian Dollar: Retail Sales Fail to Provide Lasting Boost, Will CPI Do The Trick?

The Australian Dollar, New Zealand Dollar, and Canadian Dollar all ended the day very little changed against the greenback, as commodity prices barely budged.

However, the Canadian Dollar did see a noticeable early-morning rally as retail sales excluding autos surged 1.4 percent, which was much stronger than expected. Looking at a breakdown of the report, though, it is clear that high commodity prices have had an impact since the index is not adjusted for inflation. Indeed, the gas station and food/beverage components showed the sharpest gains at 4.2 percent and 1.3 percent, respectively. While the news is relatively encouraging for the Canadian economy, it says little about current and future conditions as the retail sales report is lagging. Furthermore, with the Canadian labor markets weakening and consumer prices picking up, there is reason to believe that consumption growth will not be quite as robust going forward. Speaking of prices, the release of Canadian inflation data for the month of July is likely to remind the markets that the Bank of Canada has been somewhat hawkish in their rhetoric lately. Headline CPI is forecasted to rise to an annualized rate of 3.4 percent – the highest since March 2003 – while the BOC’s core measure is expected to edge up to a 8-month high of 1.6 percent. The Canadian Dollar is likely to respond immediately as the currency is particularly sensitive to this indicator.

Japanese Yen Could Still Gain Despite Downgrade to BOJ's Growth Outlook

Early on Wednesday morning, the Bank of Japan downgraded its outlook for exports, consumer spending, and manufacturing production, according to their latest monthly report.

The change comes as a global economic slowdown threatens to diminish trade prospects for the export-dependent country. Nevertheless, the Japanese Yen was mixed across the majors and ended the day very little changed, as the financial markets remain jittery, especially on concerns about the health of the two US mortgage giants Fannie Mae and Freddie Mac. Given this instability, traders should continue to keep an eye on technical levels and risk sentiment, as the Japanese Yen tends to trade based on these factors rather than fundamentals.

Terri Belkas is a Currency Strategist at FXCM.