As economic activity in Canada is expected to expand for the fourth consecutive quarter, the 2Q GDP report could lead the USD/CAD to retrace the advance from earlier this month as investors expect the central bank to normalize monetary policy further in September.

The EUR/USD will come into focus this week with an ECB rate decision and the U.S. Non-farm payroll report on tap. A hawkish ECB President Trichet and a rise in U.S. unemployment could be the catalyst for a bullish rally in the pair.

Yes, the global economy is slowing, but much less sharply than the negative market sentiment would suggest. Global sentiment appears to be largely driven by the sharp deceleration in US GDP growth from 5% in 4Q09 to what now looks like barely more than 1% saar in 2Q10 (2Q GDP revisions are due this Friday, and our team looks for +1.3%).

Manoj Pradhan & Joachim Fels, Global Economics Team, Morgan Stanley

The AUD/USD has started to consolidate following a failed test of resistance at the 20-Day SMA at 0.9003. Broader sentiment appears directionless as traders try and decide if the recent flight to safety is overdone or there are legitimate concerns that may warrant additional pessimism. The high yielder is being punished as traders are erring on the side of caution as they formulate their assessment. We may not see true conviction before Friday’s Non-farm payroll report which could make the com-dollar a scalping target.