Dollar near 3-month high against Yen before G8 meeting

The Dollar rose for the second time this week and hit a three-month high against the Yen after reports showed unexpectedly strong growth in US housing starts and industrial output last month, completed with a large rise in US business activity. In addition, the Japanese first-quarter growth data was near forecasts and kept Bank of Japan on track to lift interest rates later this year. The Central Bank left interest rates on hold at its policy meeting.
Investors increasingly believe the BoJ will raise rates to 0.75% as soon as August of September and the European Central Bank is seen raising rates at least once more this year and some see the Bank of England further raising borrowing costs too in contrast to expectations for a rate cut in the United States later this year.

News and Events:
The Dollar held near a three-month high against the Yen on Thursday after an unexpectedly large rise in US business activity, backing the view that interest rates will stay on hold for some time. The strong reading in the Philadelphia Federal Reserve�s business activity index for May followed data showing that initial filing for US unemployment fell for the fifth straight week.
Analysts said the data backed a view that the US manufacturing sector recovers after a recent slowdown, and that the Fed probably will not cut interest rate from 5.25% this year.
The Yen weakened after the Bank of Japan left interest rates at 0.5% as expected yesterday, following data that showed the Japanese economy grew at a slightly softer-than-expected pace in the 1Q. Analysts expect the BoJ to raise rates to 0.75% as soon as August or September. However, they also expect the European Central Bank and the Bank of England to have raised borrowing costs as well, keeping the Yen at a disadvantage against higher yielding currencies.
Looking ahead, the only major economic data due today in US is the University of Michigan Consumer Sentiment survey for May. The Index is expected to decline to 86.5, from April�s final reading of 87.1; pushed down by rising gasoline prices and slowing jobs growth.

Today’s Key Issues (time in GMT):

G8 meeting of Finance Ministers start

08.30 GB April Retail Sales 0.6% vs 0.3% (MoM)
08.30 GB April Retail Sales 4.7% vs 4.8% (YoY)

12.30 CAD March Retail Sales 0.7% vs 0.1% (MoM)
12.30 CAD March Retail Sales Ex-Auto 1% vs 1% (MoM)

14.00 US May University of Michigan Consumer Confidence survey 86.5 vs 87.1

The Risk Today:

EurUsd sold off sharply from Wednesday’s 1.3610 high, but weakness below 1.3458 would be necessary to undermine the broader bullish tone. On the up-side, a break of 1.3610 would target 1.3623 en route to the 1.3681 trend high from end April. This would open the way toward 1.3750 trendline resistance.

GbpUsd remains heavy, having tested again 1.9771 support (38.2% retracement of the 1.9184-2.0134 advance). Renewed slippage beyond 1.9746 would reinforce the heavy tone and pave the way for an extension to 1.9659 (50% retracement of the 1.9184 to 2.0134 advance). Only a return above last week’s 2.0000 high would reverse the immediate heavy tone originating from the 2.0133 peak.

UsdJpy is set for further gains having cleared the 120.55 level - a sign that recent sideways action is resolving to the upside. There’s little resistance above this area until the 121.64 high from February 22. Maintain a bullish bias above last Friday’s 119.48 low.

UsdChf maintains the pattern of higher highs and higher lows originating from late April 1.1994 low. Further gains beyond 1.2285 are needed to suggest the advance is anything more meaningful than a correction. Initial support is around last Wednesday’s 1.2142 low.

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Resistance and Support:

By Jean-Claude Braha - ACM Advanced Currency Markets, Geneva, Switzerland