Inflation Watch

Usd lost ground in Asian Session after the greenback rallied on the back of stronger empire manufacturing survey. Speculation has been growing all morning that US CPI will print higher than market expectations. however it was the German inflation figures which stole the show and stayed elevated giving the Eur a swift bounce. EurUsd surged from 1.5800 to 1.5845 and GbpUsd jumped from 1.9620 to 1.9888. Additional European inflation figures should keep the Usd pinned until mid session and as the market adjusts to the incoming US data. Despite the RBA minutes which showed that the Central bank is clearly in a neutral bias the Aud was able to gain ground on both the Usd and Jpy. While the Aud is poised to experience weakness in the mid term, currently commodity prices (crude $114.00brl), increased risk appetite and higher yields will keep Aud supported (however slightly less against the NZD which perhaps has stronger underlying fundamentals). Note, Westpac index was slightly higher than the revised figures indicating the growth is moderating at a slower rate than markets have expected. Markets will be very critical today of European CPI figures given the collapse of the German ZEW yesterday. The Eur strength rests squarely on interest rate differentials. Furthermore, Germany's concerns over the financial markets and lasting strength of the Eur has eroded confidence ; indicating eventually that there could be spillover into the real economy and response from the ECB. However, we currently have the first ECB rate cute scheduled for Sept and the minor dip in economic growth figures will not drastically change Trichet's mind - that is unless inflation ratechanges course. Yesterday PPI figures will keep the Fed diligent and rate expectations influx. Todays CPI will be important and will be covered in depth in the European report.

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