Another very quiet night of trade in the FX markets as summer doldrums are clearly creeping in. In UK today the pound rallied above the 2.1050 level as the Trade Deficit shrank to its lowest level in more than a year. The news is positive for pounds bulls as it demonstrates that higher currency rates have not materially hurt UK exporters. In fact the improvement in the deficit was the result of stronger exports. In short, tonight’s data eliminates one of the key objections to additional rate hikes, namely that they will degrade UK trade balance position by further appreciating the currency.

In other UK news, the BRC Retail Monitor also printed better than expected rising 3.0% vs. 2.2% projected. Retail demand remains critical to any future consideration of UK monetary tightening. Some BoE officials expressed concern that the central banks latest moves may force a severe slowdown in consumer spending, but that idea was dispelled by tonight’s data, indicating that 6% rates and by their implication higher pound values may be in the offing in the foreseeable future.

In Canada today, the BOC is expected to raise rates to 4.5% and the market will be keenly interested in Dr. Dodge’s post announcement commentary. The key factor to focus on will be the posture of the BoC going forward. Although a strong loonie has certainly hurt exporters especially in central Canada, so far the attitude of the monetary officials has been largely laissez-faire as they essentially contend that the benefits of the strong currency have outweighed the costs. Still Dr. Dodge and company will not want to see a speculative stampede to the 1.000 level and therefore most likely will temper their comments to prevent any excessive moves in the unit.

Boris Schlossberg is a Senior Currency Strategist at FXCM.