Merkel comments weaken EUR, whilst the US continue to digest Bernanke's latest speech to congress

09.00 AM

GBP

Yesterday we saw the release of the Bank of England's minutes which did not paint a very positive outlook for the UK -  as usual though, it was news from the eurozone that dictated the currency price movements. The EU concerns saw the pound rise to its highest level in three and a half years against EUR following comments from German Chancellor, Angela Merkel, on the euro project, which spooked investors into selling the euro in search for safer asset alternatives.

The pound started the day on the back foot after the Bank of England minutes showed that policymakers discussed additional asset buying and a possible interest rate cut at the meeting earlier this month. The MPC members voted 7-2 in favour of increasing asset purchases under its QE programme by £50Bn, with two members, Spencer Dale and Ben Broadbent opposing the rise. The MPC members also debated a bigger £75Bn rise in QE along with discussing the deterioration in the UK’s economic outlook which also put pressure on the pound. In the May meeting, the MPC’s implied forecast was for 0.7% growth this year in the UK but their latest estimates indicated that growth would be roughly flat throughout 2012 as a whole.

Other data released on Wednesday also showed that the total number of Britons without a job dropped in the March to May period. Many analysts believe that the Olympics has been the main catalysts for the improved data but the news was not all positive as the number of people claiming unemployment benefits rose by more than analysts expectations in June.

Today we see the release of UK retail sales.

EUR

The euro once again endured a challenging day in the market and continued its slide against it’s counterparts after comments from German Chancellor, Angela Merkel. In an interview Merkel stressed her commitment to Europe but said the European project was "not yet shaped so that we can be sure that everything will turn out well". The comment did very little to calm investors fears and seemed to act as a reminder of the euro's fragility.

The German chancellor will also be in the spotlight today as German lawmakers look set to vote on Berlin's contribution to a eurozone aid package for Spain's ailing banks. The vote will be viewed as a key test to show if Merkel still commands authority within her coalition.

We also saw the release of Spanish house price data which showed a fall of 8.3 per cent year on year during the second quarter of 2012. The data is the biggest decline in home prices since the start of the eurozone crisis, with home prices falling 23.6% from 2008 peak levels. Most analysts still believe that the market bottom may still be a far way off. Some estimates showed that prices may fall another 20% after the Spanish government raised the VAT rate from 4% to 10% and removed tax incentives for first time home buyers.

Greece was also in the news again as reports emerged that the cash strapped nation requested a bridging loan to cover a bond payment next month. The troubled nation asked the EU and the IMF to provide €3.1bn to make the August 20th payment on a bond held by the European Central Bank.

Today we see the release of the eurozone current account

USD

The dollar movements over the past few days have all been dictated by Ben Bernanke speech to congress but yesterday did also see the release of the US housing starts data. The data showed a rise of 6.9 per cent from May to June, which was higher than analysts were expecting, posting the highest rate in nearly four years. Construction starts were also 23.6% higher than the previous year and single family home permits rose 0.6% monthly which was a two year high. Compared with June 2011, construction permits were up 19.3%. The data should be considered positive for the dollar as the improvement in the housing data should reduce the risk of QE3.

Also yesterday in his second day of testimony Fed Chairman, Ben Bernanke, said that economic growth remains weak and that the Fed will contemplate additional action if unemployment stays high, but he also said that he does not expect the US economy to fall back into recession.

The Fed has so far launched two rounds of bond purchases to help stimulate the economy, most recently in August 2010. The usual market response to quantitative easing programs has seen interest rates move lower and the dollar weaken. So currently with no indication of further QE we could see the opposite effect and the dollar may strengthen.

Today see’s the release of US weekly jobless claims, Existing home sales, Leading indicators and Philadelphia Fed data.