The Euro pulled back after reaching an intraday high of 1.4339 during the overnight on U.S. dollar strength, and the single-currency may continue to fall lower over the remainder of the session as investors weigh the outlook for future policy.
[B][U]Talking Points[/U][/B]
· [B]Japanese Yen: Holds Narrow Range Between 20 and 100 Day SMA[/B]
· [B]Pound: Service Activity Expands in May[/B]
· [B]Euro: Producer Prices Fall the Most on Record[/B]
· [B]US Dollar[/B][B]: Chairman Bernanke Testifies Before Congress[/B]
[B][/B]
[U]Euro, British Pound Falter on U.S. Dollar Strength, All Eyes on Chairman Bernanke[/U]
[U][/U]
The Euro pulled back after reaching an intraday high of 1.4339 during the overnight on U.S. dollar strength, and the single-currency may continue to fall lower over the remainder of the session as investors weigh the outlook for future policy. The economic calendar showed producer prices in the Euro-Zone fell at a record-pace in April, and the drop in inflation could lead the European Central Bank to take additional steps to shore up the economy as the central bank maintains its one and only mandate to ensure price stability. As the Governing Board holds a dovish outlook for price growth, expectations for further easing could lead the EUR/USD to retrace the advance from the beginning of the week, and may fall back below the 1.4100 level to test 1.4052, last week’s high, for support.
The preliminary GDP reading showed the economy contracted 2.5% in the first quarter, which was in-line with expectations, while the annual rate of growth plunged 4.6% from the previous year amid forecasts for a 4.6% drop. The breakdown of the report showed household consumption fell 0.5%, with business investments tumbling 4.2%, while government spending held flat from the previous quarter. In addition, the final services PMI reading unexpectedly ticked higher to 44.8 from 44.7, with the composite index increasing to 44.0, and the data suggests economic activity is falling at a slower pace as policymakers take unprecedented steps to soften the landing of the economy. Moreover, the producer price index 1.0% in April, while the annualized rate plunged 4.6% to mark the biggest drop on record, and the weakening outlook for inflation could lead the ECB to hold a dovish outlook going forward as price pressures falters. As a result, the central bank is surely to adopt unconventional tools at the policy meeting tomorrow, and mounting risks for deflation could lead the board to purchase more than EUR 60B in euro-denominated bonds to stem the downside risks for inflation.
The British pound pulled back from a fresh trend high of 1.6664 to hold near 1.6545 even as service-base activity increased for the first time since April 2008. The U.K. services PMI jumped to 51.7 in May from 48.7, which topped forecasts for a reading of 49.5, and the data encourages an improved outlook for future growth as service-based activity accounts for nearly two-thirds of the economy. At the same time, market participants speculate the Bank of England to expand its asset purchase program at the rate decision tomorrow as Governor Mervyn King projects a slow and protracted recovery later this year, and long-term expectations for higher interest rates in the U.K. may continue to drive the Sterling higher as economic activity improves. As a result, the GBP/USD may continue to push higher over the week, and is likely to make another attempt to test 1.6700.
The U.S. dollar strengthen across the board during the overnight as India, China, and South Korea raised support for the greenback as the reserve currency for the global economy however, expectations for a 0.9% jump in factory orders paired with a rise in the ISM Non-Manufacturing index could lead investors to raise their appetite for risk as growth prospects improve. At the same time, the ADP employment report is expected to show a 525K drop in private payrolls, which could instill a dour outlook for the Non-Farm Payrolls report due out on Friday, and a rise in risk aversion should lead the dollar higher as the reserve currency continues to benefit from safe-haven flows. Meanwhile, Fed Chairman Ben Bernanke is scheduled to testify before the House Budget Committee at 14:00 GMT today, and encouraging comments from the central bank head could weigh on the exchange rate as risk trends continue to drive price action in the financial markets.
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[I]To discuss this report contact David Song Currency Analyst: <[email protected]>[/I]
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