Talking Points
• Japanese Yen: Finds Support at 96.00
• Pound: Pace of Job Losses Slows
• Euro: Construction Activity Rises For Second Month
• US Dollar: CPI On Tap
Pound, Euro Reverse Gains On Global Recovery Concerns Despite Improving Fundamental Data
The Pound has started to trade heavy after reaching as high as 1.6483 despite a slower pace of job losses and an improving outlook from the BoE. Indeed. the U.K. economy lost 39,300 jobs in May which was far less than the 60,000 that was expected. The minutes from the last policy meeting of the BoE showed that they are becoming optimistic that a recovery is imminent. The central bank points to signs that the housing market is stabilizing and a slowing of the decline in consumer consumption. However, they still see the credit supply poutlook as remaining constrained.
The slower pace of job losses will also help lead to a recovery in domestic growth and without the threat of falling home prices we could see the U.K. economy take steps toward a recovery. However, there remain concerns over the amount of debt that the government has issued to help finance the stimulus package and bailout of financial institutions. The expectations of higher taxation going forward will limit the upside for the economy and may cap the pound’s potential appreciation. At 20:00 GMT BoE governor King and Chancellor Alistair Darling will make their Mansion House speeches and if we hear talk of an exit strategy from their quantitative easing efforts, we could see a return of sterling bullish sentiment. Look for support at 1.6185 the 20-Day SMA, with a break there leaving 1.5798 the 38.2% Fibo of 1.4397-1.6664 as the next barrier.
The Euro saw a similar reversal as sterling after reaching as high as 1.3926 as it was also a victim of global growth concerns. A rise in construction activity for a second month by 0.6% in April added to the signs that the economy is stabilizing. Meanwhile, the trade balance for April saw its surplus increase to 2.7B from 1.8B, despite expectations for a deficit of 1.5B. The decline in imports outpaced a slowdown in exports as local demand remains weak. The region may start to see a pickup in demand for its products as global demand improves but domestic growth may be slow to recover which could limit the scope of a possible recovery.
We have seen the dollar start to regain some support overnight as concerns over the type of recovery for the global economy has reignited a move toward safety. U.S. consumer prices are forecasted to decline by 0.9% from a year ago as oil prices are lower by 50% despite their recent rise. An inline print will ease some of the recent concerns that the upside risks of inflation are increasing as the central bank continues to print money. Fears are growing that the Fed may need to start tightening monetary policy sooner than their projection of mid 2010 which could limit the scope of a recovery. Either the prospect of rising interest rates or a slower recovery could generate bullish dollar sentiment. However, an inline print will confirm that current policy is appropriate and will lower interest rate expectations which could send the dollar lower.
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