Despite the abundance of German and U.S. economic data this morning, currencies continue to tread water. None of the economic reports released over the past 24 hours will sway the plans of U.S. and European policymakers. For the Federal Reserve, no action has been widely discounted by the market. The decision by European Central Bank on the other hand should lead to an increase in volatility because investors will be looking for the central bank and Europe in general to deliver on their promise to do everything to save the euro. While the recent decline in Spanish and Italian bond yields, recovery in stocks along with the rebound in the euro reduces pressure on the ECB to act, Draghi’s comments last week created expectations for greater activism. Right now investors are in wait and see mode and if the ECB disappoints, the EUR/USD could come under fresh selling pressure. In the meantime, steady Spanish and Italian bond yields kept the EUR/USD above 1.22 and U.S. data drove it above 1.23.

The latest U.S. economic reports showed personal incomes growing by 0.5% in June, up from 0.3% the previous month. Personal spending on the other hand was flat which may be discouraging for the U.S. economy but positive for American finances. With Americans finally making more and spending less, their personal savings rose to 4.4% last month, its highest since December. Inflationary pressures remain muted with the PCE deflator rising a mere 0.1%. House Prices, the Chicago PMI report and Consumer Confidence will be released later this morning and while these numbers are important, they are not likely to change the strong possibility that the Fed will hold monetary policy unchanged on Wednesday.

Up North, Canadian GDP rose 0.1% in May compared to a 0.2% forecast. Growth in Canada slowed more than expected while inflationary pressures continued to decline with the industrial product price dropping 0.3% and raw material prices falling 4.0%. Incoming Canadian data raises more questions about what is motivating the level of hawkishness within the Bank of Canada. There is very little justification for a tightening bias with growth slowing, manufacturing activity contracting, price pressures declining and retail sales growing at a sluggish rate. The recent strength of the Canadian dollar will also make life more challenging for Canadian exporters.

While volatility in the FX market has picked up with the release of U.S. data, we don’t anticipate any wild swings ahead of this week’s monetary policy announcements. It’s the end of the month and the small rise in U.S. stocks should lead to mildly negative US Dollar rebalancing flows.

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