The U.S. economy and the U.S. dollar are the focus of the market this morning with the Beige Book report scheduled for release at 2:00pm ET or 18:00 GMT. This report should provide us with a qualitative assessment from individual Fed districts of how the U.S. economy has been performing since the last monetary policy meeting. The most recent non-farm payrolls report showed an improvement in job growth but the question that we hope to be answered today is how broad based the improvement has been. At this point, most economists are saying that they do not expect much from the Jackson Hole Summit and for this reason we are far more interested in the outcome of the Beige Book report. While Bernanke’s annual speech at the Summit is the main event this week, we believe it is unlikely that he will announce any policy change at the meeting. As we wrote in Tuesday’s note, there is no need to make any rash decisions before the Federal Reserve finishes their latest forecasts and the next non-farm payrolls report is released. Signs of broad based recovery from the Beige Book should be positive for the dollar but if there is an overall sense of caution and reports of continued deterioration, the dollar will suffer.

According to this morning’s economic reports, the U.S. economy grew 1.7% percent in the second quarter. This upward revision was in line with expectations and caused primarily by an increase in personal consumption. Pending home sales also rebounded, rising 2.4% in July after falling 1.4% the previous month. The data was good considering that the market was only looking for a 1.0% rise. Recent housing market reports including data on sales of existing and new homes have been consistent with stabilization and gradual recovery. The rally in equities and low level of interest rates have given investors confidence to dip their toes back into the market.

Meanwhile there has been a quite a bit of intraday volatility in the EUR/USD. The euro sold off at the start of the European trading session but recovered shortly thereafter. Right before the North American session began, we saw similar price action. The big story out of Europe was the op-ed piece penned by ECB President Draghi in Die Zelt that supposedly echoed the comments he planned to make at Jackson Hole. In the article he reiterated the ECB’s pledge to do what is necessary to maintain price stability. More importantly, he added that single monetary policy may at times require exceptional measures and strong decisions need to be made to manage the euro. These comments confirm our belief that the ECB is up to something big.

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