- Japanese Yen: Mixed Against the Majors
- Pound: Overnight Rally Tapers Off
- Euro: Construction Outputs Slump in July
- U.S. Dollar: Consumer Prices, U. of Michigan Confidence on Tap

European Central Bank board member Ewald Nowotny said the Governing Council will begin to discuss withdrawing the emergency programs going into the following year while speak to reporters in Vienna, and went onto say that the possibility for a rate hike will be discussed at a “later stage” given the uncertainties surrounding the economic outlook. In addition, Mr. Nowotny expects to see a slower pace of growth in the banking sector as policy makers push to increase financial regulation, and said that the new initiatives should help to stabilize the industry as “commercial banks tighten up their lending practices.” The comments suggests that Basel III could dampen the rebound in economic activity as the ECB expects to see an “uneven” recovery, and the central bank may continue to talk down speculation for a rate hike at the beginning of 2011 in order to stem the downside risks for the region.

As policy makers maintain a dovish outlook for future policy, the Euro may struggle to retrace the decline from earlier this year, and the central bank may look to preserve monetary support during the first-half of 2011 as the economic recovery cools. Producer prices in Germany unexpectedly held flat for the second time this year amid forecasts for a 0.3% rise in August, while construction outputs in the euro-region slumped 3.1% in July to mark the biggest contraction in five-months. As the outlook for growth and inflation deteriorates, the near-term rally in the EUR/USD could taper-off in the latter half of September, which could lead the pair to pare the rally carried over from the previous month. If the euro-dollar fails to hold above 1.3000 in the days ahead, we are likely to see price action fall back towards the 50-Day at 1.2886 to test for near-term support.

The British Pound pared the overnight rally and fell back from a high of 1.5728 during the European trade, but the exchange rate may continue to push higher over the following week as it breaks out of the narrow range carried over from August. As the Bank of England is scheduled to release its policy meeting minutes on September 22, we expected to see board member Andrew Sentance push for another 25bp rate, but a shift in the vote count would spark increased volatility in the exchange rate as investors weigh the prospects for future policy. If more members of the MPC side with Mr. Sentance, we could see the GBP/USD continue to retrace the decline from the previous month and work its way back towards 1.6000. However, a three-way split within the central bank could spark a bearish reaction and lead Cable to give back the recent advance.

The greenback weakened against most of its currency counterparts, with the USD/JPY slipping to a low of 85.59, and the dollar could face increased volatility going into the North American trade as the economic docket is expected to reinforce a mixed outlook for the world’s largest economy. Consumer prices in the U.S. are forecasted to fall back to an annualized pace of 1.1% in August from 1.2% in the previous month, while the U. of Michigan Confidence survey is anticipated to improve to 70.0 in September from 68.9 in the month prior. The drop in price growth could spark increased selling pressures on the greenback as the slower pace of inflation allows the Fed to maintain a loose policy stance, while the rise in household spending could spur a rise in risk appetite as the outlook for future growth improves.

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