An uneventful night in FX as most majors consolidated their losses against the greenback, trading in tight ranges through Asian and early European trade. IFO survey in Germany matched expectations printing at 106.4 down from 107 the month prior. This was the first time in a year that the survey registered back to back monthly declines signaling that the EZ expansion is beginning to slow. There was, however, little concern from the IFO institute itself regarding the drop as the survey reading remains near the top of the recent range. Nevertheless, the institute did note that a rise to the 1.40 EUR/USD exchange rate, should it occur, would present more serious problems for the German industrial sector. Overall, the decline in the IFO was relatively mild as the negative impact of higher euro on German exporters was largely offset by booming global demand and stronger consumption at home aided by the steadily improving labor markets.

The one piece of data tonight that may prove to be euro bullish in the near future was the higher than forecast rise in M3 money supply. M3 expanded at 10.9% pace vs. 10.7% consensus estimates and indicates that credit conditions in the Euro-zone remain loose. M3 is one of the key variables in ECB policy and tonight’s news may lead to a more hawkish posture by Mr. Trichet and company. Despite growing concerns by EZ finance ministers that euro’s rapid rise may dampen economic growth in the region, the ECB’s primary mandate remains price stability and as such further acceleration in the growth of the M3 money supply would almost certainly elicit another rate hike from the central bank. That is why next month’s M3 data may be critical to determining the timing of ECB’s next tightening action. Should the pace of M3 expansion reach 11% in August, the ECB is very likely to hike rates by 25bp in September in order to contain the growing price pressures in the system.

Meanwhile, the news across the pond was far less hawkish as UK Nationwide survey showed marked deceleration in house price increases. The survey registered only a 9.9% year over year gain vs. 10.6% forecast. This was the weakest monthly rise in 15 months and the first time in 4 months that the yearly numbers slipped below the double digit barrier. While UK housing clearly continues to appreciate, the pace of that appreciation has slowed significantly as UK short term rates have increased to 5.75%. The Nationwide is the second housing survey this week to report a downward surprise suggesting that the BoE is very likely to remain stationary at its MPC meeting in August as it continues to observe the impact of its prior policy decisions. The pound slipped below the 2.0500 on the news and remained below that level throughout the morning London trade.

Boris Schlossberg is a Senior Currency Strategist at FXCM.