Euro Unchanged Despite Weaker PMI, France'?s Lagarde Calls For Realignment

[B]Talking Points
• Japanese Yen: Holds Above 103.0
• Euro: PMI Weaker on Services
• Pound: Growth Forecasts Holding Up
• US Dollar: Existing Home Sales On Tap[/B]

Despite a weaker than expected Flash PMI reading, the Euro found significant support at 1.5700. The Euro-Zone Composite Purchasing Manger’s Index fell to 51.1 in May from 51.9 the month prior, led by the service component falling to 50.6 from 52.0. The sector which accounts for two thirds of GDP fell well short of economist’s predictions of 51.7, as it saw declines in employment, new and outstanding business and business expectations. Manufacturing fell as expected to 50.5 from 50.7 on weaker employment. The regions two largest economy’s Germany and France both saw a significant decline in services and mild improvements in manufacturing.

Although the Euro started selling off leading up to the releases the dour fundamental data didn’t deter Euro bulls for long. ECB member Axel Weber statements that globalization has led to “heightened price pressures” reignited inflation concerns and the possibility of a future rate hike from the central bank. The 15 country regions growth is slowing, which has led to France’s finance minister Lagarde to call for a realignment of the world’s currencies and stating that President Trichet is overly focused on inflation. This will assuredly reignite talk of intervention by the world’s central banks.

The second estimate of U.K. GDP confirmed the prior predictions of 0.4% quarterly growth and annualized growth of 2.5%. If it holds at that pace, it would be the slowest since 2005 as the credit crisis continues to weigh on business services and construction. The economy is expected to continue to slow as the housing slump begins to spread to the broader economy and exports from abroad have started to weaken. The report validates the BoE expectations of a few quarters of slowing growth, which the central bank is willing to live with in order to see inflation move toward its 2% target. The elimination of possible rate cuts from the MPC continues to provide Sterling support as it maintained above 1.9750 throughout the overnight session.

It has become pretty clear that as long as the housing slump continues the dollar will continue to be weak. Therefore, today’s existing home sales will be closely watched as the housing market has recently shown signs of further weakening, as home prices fell another 3.1% in the first quarter, despite all the efforts from the Fed.
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