Pound Propels Higher on CBI

As we said yesterday. "EUR/JPY...continues to be well bid in the near term as interest rate speculation and rumors of additional exotic options barriers provide support for further forays above the 150 level." We were correct in this assumption, as EUR/JPY made another go at 150.00 during late Asian trading, hitting a high of 150.24.

The pair dropped yesterday afternoon on comments made by Japanese finance minister Sadakazu Tanigaki, who mentioned that the Ministry of Finance was "closely watching" then yen's movement against the euro. However, it is doubtful that the MOF would physically intervene by selling EUR/JPY, as they are likely more concerned with developments versus other currencies, such as the USD.

Additionally, "closely watching" is the term MOF officials typically use when they talk to reporters about foreign currency exchange.

Economic data out of Japan helped drive the EUR/JPY rally in the Asian session, as well as smaller gains in USD/JPY to a morning high of 117.12. The combination of weaker retail sales and a contraction in wages sucked more air out of Japan's growth story following last week's deflationary CPI readings. The likelihood of future expansionary GDP posts seem to diminish each time a Japanese release comes out, especially when the economy is in need of domestic demand growth to fuel higher private consumption.

GBP/USD skyrocketed up towards 1.9040 after spending much of the Asian session around the 1.8975 figure as UK CBI Distributive Trades surprised to the upside and posted a reading of +12 in the month of August from +7 in July. Additionally, September expectations jumped to +13 from +1 in August, indicating sales optimism at the highest level since May 2004.

Furthermore, the release of higher UK mortgage approvals highlights a housing sector that refuses to cool. While the BOE is widely expected to keep rates on hold at 4.75% when they meet in September, further indications of growth could provide impetus for the Bank of England to turn hawkish in coming months.

In other economic news, the KOF Swiss leading indicator made a surprising drop down to a reading of 2.42 in August from July's downwardly revised 2.48. It appears that sustained higher energy costs have finally taken its toll on both Swiss consumers and businesses alike. Despite the decline, the KOF reading still points to robust Swiss growth and shouldn't dissuade the SNB from hiking rates when they meet again in September.

Event risk today lies in USD data, with Q2 GDP and Personal Consumption figures set to be released. Additionally, traders may look to the ADP employment change ahead of Friday's NFP release, which tends to keep the markets on edge. Surprises to the downside could jeopardize greenback strength, especially following yesterday's FOMC release indicating concerns about the housing sector.