US Dollar (USD) Steady as Fed Fund Futures Price in at Most, a 25bp Cut by Dec (page 2 of 2)

This could help the Euro bounce as key US data does not come out until Wednesday.

British Pound

The market is still trading off of the surprise interest rate hike from the UK last week. This morning's inflation data was mixed and not exactly delivering the major jump in inflation that everyone had expected after the cautionary words from the Bank of England last week. Monthly producer input prices and core output prices rose less than expected. However annualized growth for input prices and headline output prices were stronger. Overall the report was more positive for the British pound, but that was primarily due to the upward revisions in input prices for the month of November. The more import inflation numbers that we are watching for are tomorrow's consumer price reports and Friday's money supply reports. With the GBP/USD reaching a key technical resistance, if CPI fails to deliver strong numbers tomorrow, we could see a near term top in the currency pair as the market questions whether the BoE made the right decision. More likely than not however, the data should come out firmly and support the BoE's latest rate hike.

Japanese Yen

Despite the possibility of an interest rate hike this week, the Japanese Yen continued to weaken against the majors. There were a lot of comments from Japanese officials last night and the collective message seems to be that they support a rate hike, but only for 25bp. Japan's Economics Minster said that interest rates need to be adjusted gradually while the Chief Cabinet Secretary urged the BoJ to make an appropriate monetary policy decision. These comments along with the recent weakness in the Yen against both the US dollar and Euro suggests that the BoJ will raise rates on the 18th, but at the same time signal that this is a one off rate hike and that the economy will need time to absorb its impact. Back in July when they delivered their first rate hike, they moderated the market's response to the move by ending their statement with the comment that "very low interest rates will probably be maintained for some time."

Commodity Currencies (CAD, AUD, NZD)

The Australian, New Zealand and Canadian dollars are all stronger across the board thanks to firmer economic data and higher commodity prices. Australia reported an increase in investment lending as well as inflation, which offset the drop in home loans. Canada on the other hand reported a rebound in vehicle sales. Although both were encouraging, the primary driver of the move was the technical break in gold prices which sent the yellow metal to a fresh 2 week high. The Bank of Canada is set to convene on interest rates tomorrow, no changes are expected but the statement and the Monetary Policy Report update on Thursday will be examined closely for clues on how the central bank stands on inflation, economic growth and monetary policy going forward. New Zealand will also be releasing Q4 consumer prices. A further drop is expected as the kiwi continued to rise in Q4 while oil prices slide.