Euro, Pound Push Higher on U.S. Dollar Weakness, EU Sees 'Sustainable Recovery'

The Euro failed to break above the 20-Day moving average for the second consecutive day, with the single-currency tipping lower throughout the European trade to hold near 1.3910. The EUR/USD found support ahead of 1.3880 during the overnight, and rose to a high of 1.3951, but the lack of momentum to retrace the decline from earlier this week may keep the pair within a tight range over the remainder of the trading session.

[B][U]Talking Points[/U][/B][B][/B]

· [B]Japanese Yen: Crosses Above 100-Day SMA to 96.00[/B][B][/B]

· [B]Pound: Rally Well Supported by 20-Day Moving Average[/B][B][/B]

· [B]Euro: German Producer Price Hold Flat in May[/B][B][/B]

· [B]US Dollar[/B][B]: May Continue to Lose Ground as Risk Appetite Improve
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The Euro failed to break above the 20-Day moving average for the second consecutive day, with the single-currency tipping lower throughout the European trade to hold near 1.3910. The EUR/USD found support ahead of 1.3880 during the overnight, and rose to a high of 1.3951, but the lack of momentum to retrace the decline from earlier this week may keep the pair within a tight range over the remainder of the trading session. Meanwhile, the economic docket continued to reinforce a weakening outlook for the region, with German producer prices falling to a 22-year low in May from the previous year.

Producer prices in Germany held flat in May, with the annualized rate falling 3.6% from the previous year, driven by a 47.4% drop in heating oil, while excluding energy costs, prices slipped 2.5% from a year earlier. Meanwhile, EU policymakers said that the economy is well on track for ‘sustainable’ recovery,’ and went onto say that ‘further budgetary stimulus would not be warranted.’ The group also called for a ‘creditable exit strategy’ in order to stem the long-term risks for inflation, while they pledged to support the banking industry as financial conditions remain ‘challenging.’ At the same time, ECB board member Lorenzo Bini Smaghi argued that the financial crisis reinforces the need for increased supervision, and went onto say that policymakers may lose the sense of urgency to take a hold of the opportunity as market sentiment improves. Nevertheless, as ECB expects economic activity to stabilize later in the year, hopes of a marked recovery may continue to drive the single-currency higher as the central bank puts a floor on the exchange rate.

The British pound advanced to a high of 1.6451 on the back of U.S. dollar weakness to retrace the sell-off from mid-week. The GBP/USD rally continued to be well supported by the 20-Day moving average, and the pair may continue to push higher as investors hold long-term expectations for higher interest rates in the U.K. Meanwhile, BoE Governor Mervyn King said that there have been signs that the downturn in the economy was leveling off, but warned ‘strong conclusions’ should not be drawn as he expects economic confidence to ‘take a lot longer to recover.’ The comments suggests that the outlook for future growth remains uncertain as the region faces its worst recession in over half a century, and the rise in commodity prices may continue to take a toll on the real economy has consumers face a weakening labor market paired with the downturn in the housing market.

The U.S. dollar continued to lose ground during the overnight following the rebound in risk appetite, and the greenback may trend lower over the next few hours of trade as the equity futures foreshadows a higher open for the U.S. market. The advance in global equities is likely to fuel demands for higher risk/reward investments, and the lack of event risk coming from the economic docket could leave the greenback at the mercy of risk trends.</span>

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[I]To discuss this report contact David Song Currency Analyst: <[email protected]>[/I]