EUR/USD: Quiet Before Jackson Hole Speech

• The Commerce Department said US non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 1.6% last month, the largest gain since January. These so-called core capital goods orders advanced 0.5% in June. The rise in July marked the first back-to-back gain since January 2015.

• With demand for core capital goods orders rising briskly last month, overall orders for durable goods surged 4.4% in July. Durable goods inventories rose last month after six straight months of decline. Shipments of core capital goods, which are used to calculate equipment spending in the government's gross domestic product measurement, fell 0.4% last month after decreasing 0.5% in June. But labor market strength should support consumer spending and cushion the blow on the economy from weak business investment. The Atlanta Fed currently forecasts the economy will grow at 3.4% annualized rate in the third quarter.

• In a separate report on Thursday, initial claims for state unemployment benefits slipped 1k to a seasonally adjusted 261k for the week ended August 20. It was the third straight weekly decline in claims.

• US financial markets were little moved by the data as investors were focusing on Janet Yellen's speech. Janet Yellen's keynote address at a global gathering of central bankers in the US mountain resort of Jackson Hole is due at 14:00 GMT.

• Kansas City Fed President Esther George, whose bank has hosted the conference here since 1978, said the Fed should raise US interest rates gradually, given progress on employment and inflation. She told Bloomberg TV: “I think it’s time to move.” George, the only policymaker to dissent against the Fed's decision last month to leave rates unchanged at the fifth straight policy meeting, said she is "not convinced" that a fundamental rethink is necessary at this point.

• Dallas Fed President Robert Kaplan said “the case is strengthening” for a rate hike.

• USD reaction to Janet Yellen’s speech today will depend to a great extent on how investors adjust expectations of further policy action. The Fed message is expected to downplay the chances of a September move, which are already low according to the fed funds curve (28%), but Ms. Yellen’s remarks may potentially push investors to raise somewhat their expectations of a rate hike in December. A move in that month is still our scenario, but markets are now assigning only a 54% probability of this outcome, given the Fed prudence so far. Having said that, we doubt that increasing chances of a December hike will offer USD strong support because such a move is already sufficiently priced in by the US forward curve.

• We cancelled our EUR/USD bid yesterday due to elevated risk ahead of Yellen’s speech.

USD/JPY: Consumer Prices Post Biggest Annual Fall In Three Years

• Japan’s core consumer price index, which excludes volatile fresh food prices but includes oil products, fell 0.5% in July from a year earlier, the fifth straight month of declines, data showed on Friday. It exceeded a median forecast for a 0.4% decline and June's 0.4% drop.

• While falling energy costs were mainly behind the slide in consumer prices, rises in imported food prices and hotel room rates moderated in a sign that weak consumption is discouraging firms from passing on rising costs. A strong yen also pushed down import costs, offering few justifications for retailers to raise prices of their goods.

• Underscoring Japan's sticky deflationary mindset, the ratio of goods and services making up CPI that saw prices rise from a year earlier fell to 60.2% in July from 62.3% in June.

• Despite three years of heavy money printing by the BOJ, weak household spending and a strong yen pushing down import costs have kept inflation distant from the bank's 2% target. The market expects the BOJ to ease further next month, when it conducts a comprehensive review of the effects of its existing stimulus programme.

• A separate indicator compiled by the BOJ that strips away the effect of both energy and fresh food costs showed consumer prices rose 0.5% in the year to July, slower than a 0.7% annual increase in the previous month.

• We expect consumer prices to pick up in or around early next year as the downward pressure from energy costs wanes, though any rebound may be tempered by soft consumption and a strong yen pressing down on the cost of imports.

• We adjusted our sell order ahead of today’s Janet Yellen’s speech. We plan to sell USD/JPY at 101.90.