Overall, the final G-20 statement reflected the general consensus that a global economic rebalance is necessary, with heavily indebted Western nations undergoing deficit reduction programs and surplus-rich Eastern nations allowing their economies to develop into a more consumer-driven model.  Little was made of the value of China’s Yuan, as the group’s agenda focused on a global scale and emphasized recent fiscal troubles in the Euro-Zone.  Based on the discussions, it appears that European countries will undergo serious fiscal consolidation in an effort to restore market confidence, while the U.S. will continue its deficit spending in the near-term and look to reign in its budget deficit further down the road.  This is generally positive for U.S. stocks in the near-term, as loose monetary policy coupled with government spending would likely buoy economic conditions and provide a boost for equities.  However, concerns remain that European nations may fall back into recession if austerity measures squash an already fragile recovery in the Euro-Zone. If this were the case, equities across the globe could be at risk of major downside pressure.

On the currencies front, the U.S. Dollar may resume its strong rally as risk-seeking investors favor U.S. equities over their European counterparts.  Recently, the EURUSD has consolidated back to the $1.23 level after falling below the $1.19 level in June.  Although austerity measures would often favor a country’s currency by restoring investor confidence, the measures soon to be undertaken in Europe may reduce the region’s already anemic growth to a point at which yield-seeking investors begin searching for other investment opportunities.  This would further undermine policy efforts in the region and could lead to a downward spiral in the currency.

Euro / US Dollar

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

Rumors of SNB intervention in the currency market may have been propelled by updated government forecasts and commentary earlier today.  Specifically, the Swiss government cut its forecast for economic growth in 2011, citing the likelihood of weak exports as euro-region nations attempt to reduce their budget deficits.  The State Secretariat for Economic Affairs said that the Swiss gross domestic product will likely rise 1.6 percent next year, worse than the previous estimate for growth of 2 percent.  The state secretariat specifically stated that an “additional burden” to the Swiss economy could be the “appreciation of the Swiss franc versus the euro.”

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

Commodities – Energy

Crude Traders Unable to Exploit Technical Break as Risk Ways the Market Down

Crude Oil (LS NYMEX) –  $80.39  //  -$0.48 //  -0.59%

Without momentum to step in to support yesterday’s push above $80.50, the active light sweet crude futures contract on the NYMEX would ultimately be led to a corrective move. Therefore, while the commodity technically marked its highest close since January 11^th Wednesday, the market is still anchored to the congestion that has stalled progress for going on two weeks now. Undermining speculative efforts to carry crude to a new 16-month high are the dampening effects that stalled risk appetite has had across the capital markets. The same hesitation at the threshold of a new trend was seen in equities and EURUSD. The curb on sentiment is still a culmination of many different factors (including the struggles of an economic recovery, a withdrawal of government stimulus and uncertainty in sovereign debt risk); but risk aversion was leveraged today through a few notable events. The European Central Bank and Bank of England’s respective monetary policy decisions would offer little guidance on the difficult balance between growth and debt reduction. Both groups would maintain their benchmark rates and the BoE maintained its 200 pound bond purchasing program. However, the ECB would take another, measured move towards tightening with the announcement that it was switching to a variable rate on its three-month cash offers. Exacting a greater effect on sentiment, Greece finally decided to go forward with its necessary 5 billion euro bond sale after its spreads dropped following yesterday’s additional austerity cuts. With a bid of nearly three times what was offered, the market seemed confident in Greece’s ability to finance its debts. Nonetheless, calls for the EU to announce details on any aid package should the member economy need it from Finance Minister Papaconstantinou reflects the fine line this region is walking.

Going forward, it is very unlikely that oil will be able to decouple from its role as a speculative instrument. With global investors wary of adding to risky positions for fear of an unforeseen crisis, going long energy when global growth is still tame would be a risky step – especially at the market’s current highs. As for the ongoing adjustments to demand forecasts (through growth readings), the economic docket was light meaningful releases. Topping the list was the revision to the Euro Zone’s fourth quarter GDP figures. Whereas the headline figures for growth were unchanged at a 0.1 percent increase over the three-month period, household spending was notably upgraded to an unchanged figure. In other news, US factory orders rose by 1.7 percent in January and consumer spending – measured through the ICSC Chain Store Sales report – rose 2.7 percent. Tomorrow, the US non-farm payrolls could give the most meaningful adjustment to growth forecasts for the world’s largest economy that the market has seen in some time. Expectations are already set low with a forecast for 65,000 jobs lost and an uptick in the unemployment rate to 9.8 percent; but this speaks more to the slow recovery the economy has ahead of it rather than ushering in renewed fear of a secondary recession. From the supply side, the US Department of Energy inventory report for the week ending February 26^th yesterday recorded a 4.03 million barrel increase – extending the longest series of weekly increases since May and which pushed total inventories to its highest level since August. Alternatively, refineries increase their utilization rates to 81.9 percent – the highest level since October.

Watch our weekly, live coverage of the DoE Inventory figures every Wednesday beginning at 10:15 AM EST.

Commodities – Metals

Tempered Risk Appetite Draws Gold’s Controlled Rally to a Close

Spot Gold  -  $1,131.80  //  -$8.10  //  -0.71%

Spot gold fell for the first time in six days, ending the longest stretch of gains since early October. However, this pullback would ultimately come at the same pace the initial upswing was running. Quantifying the lack of momentum behind the metal’s recent bull trend, the CBOE’s Gold Volatility Index fell to a seven-week low of 20.06 percent. Notably, this activity levels just above the January and October lows that preceded forceful bearish and bullish waves respectively. This trend towards moderation comes from the soothed sense of financial uncertainty that peaked with the perceived Greek crisis. However, this is not to mean that risk trends have vanished for good while inflation and growth concerns step back in. Greece’s ability to fund its deficit is still questionable and a revival in market-wide fear could expose doubts about this region. Yet, even if this hot spot for investor anxiety were to fade, there is still a matter of ballooned global deficits and warnings surrounding sovereign credit ratings for even the largest economies. This raises the value of the metal as a safe haven when investors are looking for an alternative to devalued fiat currency. In the meantime, Friday’s US employment report could resuscitate gold bug’s focus on risk trends as this data weighs on investors’ confidence about the global recovery and further exacts its influence on the US dollar.

Spot Silver  -  $17.12   //  -$0.08  //  -0.44%

Like its more expensive counterpart, silver would end the day in the red. However, the pullback the metal would put in for was notably more controlled than the series of daily advances that preceded it. Lacking the clear function as a store of value that gold so blatantly exploits, this commodity is more sensitive to the whims of risk appetite and the actions of the US dollar. This could lend itself to leveraged volatility following the release of the often-unpredictable US NFPs.

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

US Dollar, Japanese Yen Still Under Pressure – Bernanke’s Jackson Hole Speech May Trigger Breakouts on Friday
US economic data helped provide a boost to equities, and thus weighed on the US dollar and Japanese yen, though trading ranges across the majors were so small one might believe it’s a holiday. Looking to the data on hand, the Conference Board’s leading economic index rose for the fourth straight month in July, this time by 0.6 percent thanks to improvements in the average workweek, jobless claims, stock prices, and the interest rate spread. Meanwhile, the Federal Reserve Bank of Philadelphia’s manufacturing index unexpectedly surged to 4.2 in August from -7.5. This was the first positive reading, signaling an increase in business activity, since September 2008 as prices paid, prices received, new orders, and shipments all rose significantly from the previous month.

The “Philly Fed” improvement was in line with what we saw in Monday’s release of the Federal Reserve Bank of New York’s “Empire” manufacturing index, but also highlights the fact that the only strong-points in the economy have been related to manufacturing, and more specifically exports and automobiles. First, the sustainability of growing exports is questionable as GDP is likely to remain quite low in the economies of the nation’s biggest trading partners through the end of the year. Second, the recent increases in auto sales have been attributed to the “cash for clunkers” program, in which consumers get a cash rebate if they trade in their old car for a newer car with better gas mileage. That said, the impact of the program will not last forever, as it ends next Monday, and an enduring US economic recovery may not be possible until demand for other consumer goods improves, which will be difficult in the face of rising unemployment and the shift away from spending via credit to increased saving.

Other second-tier US data was disappointing, with initial jobless claims rising by 15,000 during the week ending August 15 up to 576,000, while continuing claims rose by 2,000 during the week ending August 8 to 6,241,000. Adding to the mix, the Mortgage Bankers Association of America said that mortgage delinquencies rose to 9.24 percent in Q2 from 9.12 percent, the highest since recordkeeping began in 1972.

Friday’s release of NAR existing home sales could highlight the still-lackluster status of the housing market, as starts and building permits were both mildly disappointing on. Bloomberg News is currently calling for sales to rise for the fourth straight month to an 11-month high of 5.0 million from 4.89 million. While there are many reasons why sales could increase, including the US government’s $8000 tax credit for some homebuyers, low interest rates, and cheaper prices, there are also reasons why recovery in the housing sector may take a while, namely: rising unemployment. As long as the unemployment rate continues to climb, there will be a perpetual downdraft on property sales, which means that growth in the housing market may be quite meager throughout the rest of the year.

The main piece of event risk that traders should be watching, though, will be Federal Reserve Chairman Ben Bernanke’s 10:00 ET speech at the Jackson Hole Conference. The speech is entitled “Reflections on a Year of Crisis,” making it sound like most of his comments will focus on what the Fed has done in response to the financial crisis. No matter what is said, US dollar volatility is likely to pick up quite a bit, but if the speech sticks with a very neutral bias, as we saw in the Federal Open Market Committee’s policy statement last week, the US dollar may continue lower. On the other hand, any comments that stoke fears amongst investors have the potential to spark risk aversion, with flight-to-safety benefiting the greenback and Japanese yen. Regardless, given the very small trading ranges we’ve been seeing and low liquidity throughout the financial markets, there seems to be a big risk of breakouts throughout the majors on Friday.

Related Articles: USD, JPY – Why the Low-Yielders’ Rally May Not Be Over Yet, Yen Crosses: Former Support is Now Resistance

British Pound Falls as Widening Budget Deficit Raises Risks for UK Credit Downgrade
UK retail sales rose by 0.4 percent during the month of July, marking the second straight increase, while the annual rate rose to a 14-month high of 3.3 percent from 3.1 percent.  However, this didn’t have much of an impact on the British pound. Instead, the currency took a hit and finished the day as the weakest of the majors after the UK budget statement hit the wires. The UK government posted a deficit of 8 billion pounds in July, the biggest since recordkeeping began in 1993, highlighting the dour state of the nation’s finances. Standard & Poor’s lowered its outlook on the UK’s AAA credit rating to “negative” from “stable” in May for this very reason, and if we see this trend continue, the risk for an actual downgrade will grow and put greater pressure on the British pound.

Euro, Swiss Franc Still Testing Key Resistance vs. US Dollar
The euro and Swiss franc closed Thursday just below yesterday’s highs against the US dollar, but given the very tight trading ranges and low liquidity we’ve been seeing, there’s no guarantee we’ll see any sort of break overnight. There were no Euro-zone releases on hand, but the Swiss franc gained very briefly following the release of Swiss trade data, as the nation’s trade surplus widened to SFr 2.35 billion from a revised SFr 1.5 billion. The increase was due to a 4.1 percent increase in exports, as European demand improved, and a 1.7 percent drop in imports. The news was encouraging for the Swiss economy, as foreign trades account for roughly half of Swiss GDP. In fact, Q1 GDP contracted at its quickest pace in 18 years after exports dropped 5.4 percent, so today’s data suggests Q2 GDP could show much better results. Adding to this, the Swiss ZEW survey of investor sentiment jumped to a 3-year high of 18.6 in August from 0, signaling a sharp improvement in confidence.

For the most up-to-date forex analysis and news, visit: www.forexstream.dailyfx.com

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com

US Dollar Plummets as US Assets Lose “Safe Haven” Luster, Japanese Yen Mixed Ahead of BOJ Announcement
The combination of the plunge in the US dollar and Treasuries, vast drops in FX carry trades, the equity markets, and oil, along with a jump in the CBOE’s VIX volatility index tells us one thing: the greenback and US assets in general may be losing their luster as “safe haven” assets. Following S&P’s downgrade of the UK’s economic outlook from “stable” to “negative” due to “deteriorating public finances,” there has been increased discussion of the same thing happening to the US as national debt levels soar in light of the government’s efforts to bail out Main Street and Wall Street. However, the Japanese yen did, to a certain degree, maintain its link with risk trends.

Meanwhile, the release of the US Labor Department’s jobless claims report reflects very little change in the employment outlook, as initial claims fell by 12,000 during the week ending May 16 to 631,000 while continuing claims jumped by 75,000 during the week ending May 16 to another record high of 6,662,000. Indeed, these moves suggest that while the pace of job losses, as reflected by non-farm payrolls (NFPs, will slow further, the unemployment rate is likely to continue climbing higher. This was something projected by the Federal Reserve during their April policy meeting, as the FOMC meeting minutes showed that the range of forecasts shifted from 8.0 percent – 9.2 percent up to 9.1 percent – 10 percent.

In more positive news, the Conference Board’s leading economic index jumped 1.0 percent in April, the first increase since June 2008 and the biggest increase since November 2005. The improvement was led by components such as average workweek, jobless claims, consumer goods orders, stock prices, interest rate spread, and consumer expectations. Also, the Philadelphia Fed’s manufacturing activity index rose to -22.6 in May from -24.4, signaling a slower contraction.

Looking ahead to Friday, there will be very little in the way of US event risk ahead of Monday’s US Memorial Day holiday and market closure. That said, RSI on the daily charts of the DXY index has fallen into oversold territory, and when this happened in December 2008 and March 2009, we subsequently saw price bounce higher. As a result, there is potential for the greenback to stage a recovery versus the majors in the near-term, though it could ultimately be short-lived. For the Japanese yen, traders will see the release of the Bank of Japan’s rate decision, and they are widely anticipated to stay neutral at 0.10 percent. The thing to watch will be the BOJ’s economic outlook, as indications that the recession is nearing an end could offer a boost to FX carry trades overnight.

Euro, British Pound Rally Continues Despite UK Outlook Downgrade by S&P
The British pound fell sharply this morning versus most of the majors, pushed GBP/USD down roughly 250 points toward 1.5550 and EUR/GBP up over 150 points toward 0.8850 on news that S&P lowered its outlook on UK debt to “negative” from “stable,” but ultimately affirmed their long-term credit rating at AAA. Negative news for the currency also came from the UK’s Office for National Statistics, which said that business investment contracted for the third straight quarter in Q1 at a rate of -5.5 percent, marking the steepest drop since Q1 2004 when investment plunged 21.38 percent. A breakdown of the report shows that manufacturers and non-manufacturers alike cut back on their investments, though construction firm reductions were less than in recent quarters at -9.0 percent. Ultimately, a lack of investment indicates a lack of confidence in future demand and the potential for further job cuts down the line. Positive news came in the way of a 0.9 percent rise in UK retail sales for the month of April, the second straight increase.

By the time the US trading session got going, though, a steady and steep plunge in the US dollar across the majors propelled both GBP/USD and EUR/USD above Wednesday’s highs while EUR/GBP eased back down toward 0.8750. Now, daily charts of GBP/USD show that RSI is in overbought territory while EUR/USD is nearing that point, suggesting we could see reversals in the near-term, though another spike higher may not be out of the question.

Looking ahead to Friday, UK GDP for Q1 is projected to go unrevised at a nearly 30-year low of -1.9 percent, while the annualized rate should hold at a 28-year low of -4.1 percent. If these figures are downgraded in any way, the British pound’s rally could easily be cut short, while readings in line with forecasts should have too much of an impact on price action. According to the Bank of England’s median growth projections published in the latest Quarterly Inflation Report, GDP may be posted at -4.72 percent in Q2, -4.54 percent in Q3, and -3.20 percent in Q4. These forecasts are based on interest rates staying on 0.50 percent and a continuation of the BOE’s 125 billion pound quantitative easing (QE) program, but if the growth outlook starts to deteriorate further, there’s no stopping the BOE from considering expanding their QE program further.

Canadian Dollar Could Break Recent Highs vs. US Dollar on Canadian Retail Sales Report
USD/CAD continued its consolidation above 1.1350 on Thursday, and on Friday morning the release of Canadian retail sales could offer a boost to the Loonie as spending is anticipated to have risen for the third straight month in March at a rate of 0.5 percent. Indeed, Canadian data has generally been better-than-expected latest, as the Canadian economy surprisingly added on employees during April and Ivey PMI rose above 50 – signaling an expansion in business activity – for the first time since October 2008. If the indicator rises in line with or more than expectations, the Canadian dollar could rally, but if retail sales actually fall, the currency could tumble.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com

US Dollar Plummets as FOMC Meeting Minutes Show Potential for Expanded QE, Downgraded Growth Forecasts
The US dollar took a heavy hit on Wednesday, falling close to 2 percent against the British pound and tumbling over 1 percent versus the Canadian dollar, Japanese yen, and euro, suggesting that the currency has lost its link with risk trends. Indeed, US equities spent part of the day in positive territory but the S&P 500 subsequently ended the NY trading session down 0.5 percent.

Looking to the big US event risk for the day, the release of the minutes from the Federal Open Market Committee’s (FOMC) April meeting shed a bit more light on their policy bias. After the Federal Reserve’s last meeting, the markets saw no surprises as they left the fed funds target range at 0.0 percent – 0.25 percent and said that “conditions are likely to warrant exceptionally low levels…for an extended period.” Furthermore, the FOMC reiterated measures first announced in March, when they said they would still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn.

However, according to the minutes, some members noted that a further increase in the total amount of asset purchases may be needed later on in order “to spur a more rapid pace of recovery,” though all members wanted to wait and see how economic and financial market conditions progress. Meanwhile, the FOMC’s quarterly economic forecasts were revised, as the Committee now expects that a deeper recession in 2009, a slower rebound in 2010, a greater rise in unemployment, and a slight increase in prices.

Japanese Yen Gains as 15.2% Contraction in Q1 GDP Proves To Be Better Than Expected
An interesting thing happened in the FX markets on Tuesday night: the Japanese yen gained following better-than-expected Japanese economic data. Though Japan’s economy shrank by a record 15.2 percent in Q1 from a year earlier, the decline was not as severe as projected since Bloomberg News was calling for a 16.1 percent contraction. The drop was led by falling private demand, as consumption declined further and businesses cut back on investment. Furthermore, exports plunged by a record as the Japanese yen held strong and the economies of Japan’s biggest trade partners slowed or fell deeper into recession. All told, there’s little in the way of positive news reflected in this report, but in the FX markets, everything is relative. The bigger factor here was that the Japanese yen didn’t necessarily respond to risk trends, and as a result, leaves Japanese fundamental reports as a key thing to watch going forward.

Euro, British Pound Rocket Through Key Resistance Levels, BOE Minutes Reveal Few Surprises
The euro and British pound rocketed higher on Wednesday, as EUR/USD broke above the March and May highs of 1.3723/40 while GBP/USD pushed above a rising channel formation that had contained price since April to six-month highs near 1.5800. Meanwhile, EUR/GBP fell below its short-lived range of 0.8800-0.9025, though the next levels of support loom close by at 0.8726 (the 2/24 low) and 0.8662 (the 200 SMA). Looking at event risk from the Euro-zone and UK, it was clear that none of them had much of an impact on the FX markets. German producer prices plunged 1.4 percent in April, pushing the annual rate down to -2.7 percent, suggesting that if there are any inflation risks for the Euro-zone, they are more heavily weighted to the downside.

From the UK, the minutes from the Bank of England’s May 7 meeting weren’t as market-moving as they’ve been in the past, as there has already been significant detail revealed about the mindset of the Monetary Policy Committee (MPC).  We already knew that the BOE decided to expand their quantitative easing (QE) program by 50 billion pounds to 125 billion pounds (which happened to be by a unanimous vote), that the drop in Q1 GDP of -1.9 percent was worse than expected, and that CPI will likely will be below the BOE’s 2 percent inflation target in the medium term. While the minutes did reveal that some members thought that “a case could be made for a larger stimulus,” the high uncertainty of QE led them to believe that there was “no pressing need for the larger extension” at that point.

Canadian Dollar Breaks to 7-Month Highs vs. the US Dollar Despite Drop in Canadian CPI to 14-Year Low
The Canadian dollar surged against the greenback, pushing USD/CAD below key support at 1.1500, despite the fact that headline Canadian inflation fell to a more than 14-year low. On a monthly basis, CPI surprisingly fell 0.1 percent in April while the annual rate dropped to 0.4 percent, the lowest since December 1994. However, the decline was due primarily to weaker energy prices as core CPI – which excludes volatile items – rose 0.1 percent, leaving the annual rate at 1.8 percent, down from 2.0 percent.

According to the Bank of Canada’s last Monetary Policy Report in April, the Bank is open to quantitative easing (QE) and credit easing if nominal interest rates start to fall below zero. The Bank stated that while they could cut rates to zero in theory, it would ultimately “eliminate the incentive for lenders and borrowers to transact in markets, especially in the repo market.” As a result, inflation reports will be key to gauging whether the Bank of Canada will go the route of QE in the future, but with core levels of inflation holding at fairly robust levels, the risks remain pretty low.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com

US Dollar Down as US Housing Starts, Building Permits Plunge to Record Lows
The US dollar was the biggest loser on Tuesday as US housing data proved to be very disappointing. The Commerce Department reported that housing starts plunged by 12.8 percent during the month of April, and a whopping 54.2 percent from a year earlier, to a record low annual pace of 458,000. Likewise, new building permits slumped 3.3 percent in April, and 50.2 percent from a year earlier, to 494,000.

The main event risk for the US dollar on Wednesday will be the release of the minutes from the Federal Reserve’s last meeting on April 29. Following that meeting, the markets saw no surprises from the Federal Open Market Committee (FOMC), as they left the fed funds target range at 0.0 percent – 0.25 percent and said that “conditions are likely to warrant exceptionally low levels…for an extended period.” Furthermore, the FOMC reiterated measures first announced in March, when they said they would still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn. However, there were tinges of optimism within the policy statement as the FOMC qualified their initial, repeated remark that data indicates that the economic contraction has continued by adding that “the pace of contraction appears to be somewhat slower.”

Since this information has already been revealed, the release of the minutes may not be very market-moving. The one thing that may capture the market’s attention, though, is the FOMC’s long-run projections for growth, unemployment, and inflation as revisions that indicate that the outlook appears to be even worse than previously anticipated could hurt risk appetite throughout the financial markets, and thus lift safe-haven currencies like the US dollar. However, if the revisions improve, FX carry trades could surge and punish the greenback.

Japanese Yen Down as FX Carry Trades Gain – Watch for Japanese GDP Overnight
The Japanese yen fell against most of the majors on a day that FX carry trades continued to make headway. The status of the correlation between the JPY crosses and equities could be tested tonight, though, when Japan’s Cabinet Office will release preliminary growth readings. After three consecutive quarters of contraction, the outlook doesn’t look good. There are signs that businesses are suffering considerably at the hands of waning domestic and foreign demand. Consumers have very little to work with these days, as the jobless rate has slowly climbed to a nearly five-year high, and perhaps even worse, cash earnings growth contracted by 3.7 percent in March from a year earlier, the sharpest drop since 2002. Meanwhile, Japanese exporters have had to grapple with not only slowing global growth, but also the appreciation of the Japanese yen, all of which has led foreign-bound shipments to tumble a whopping 46.5 percent in March from a year ago, according to figures published by the Ministry of Finance. As a result, a Bloomberg News poll of economists shows expectations for GDP to fall 4.3 percent in Q1, with the annualized rate forecasted to plummet by a record 16.1 percent.

Euro, British Pound Pause Below Key Resistance – GBP/USD Faces BOE Meeting Minutes on Wednesday
The euro and British pound both gained against the US dollar, but EUR/USD was ultimately unable to break above the May 14 high of 1.3667 and GBP/USD backed down from the upper end of a channel formation at 1.5525 that has contained price since late April. There were a variety of reports from both the Euro-zone and the UK, though none proved to be highly market-moving. German investor sentiment continued to reflect divergent views on current conditions and the economic outlook in May. Indeed, the ZEW survey on investor confidence in the current situation slipped to -91.3, the lowest since July 2003, from -91.6 while the expectations component surged to a nearly 3-year high of 31.1 from 13.0.

UK inflation data was all-around weaker than anticipated, as the headline consumer price index (CPI) rose 0.2 percent during the month of April (0.4 percent expected) while the annualized rate of growth slowed to a 15-month low of 2.3 percent (2.4 percent expected) from 2.9 percent. Meanwhile, the retail price index (RPI), rose a slight 0.1 percent (0.2 percent expected), allowing the annualized rate to plunge to a record low of -1.2 percent (-1.1 percent) from -0.4 percent. In the end, the decline in headline rates of inflation leaves CPI closer to the Bank of England’s 2 percent target, but with RPI falling rapidly, the central bank may become increasingly concerned about deflation risks and thus, there is potential that they will consider expanding their quantitative easing program.

Looking ahead to Wednesday, the minutes from the Bank of England’s May 7 meeting may not be as market-moving as they’ve been in the past, as there has already been significant detail revealed about the mindset of the Monetary Policy Committee (MPC). Indeed, we already know that the BOE has decided to expand their quantitative easing program by 50 billion pounds to 125 billion pounds, that the drop in Q1 GDP of -1.9 percent was worse than expected, and that CPI will likely will be below the BOE’s 2 percent inflation target in the medium term. However, the growth and inflation outlook published in the BOE’s Quarterly Inflation Report suggests that the central bank may be open to expanding their quantitative easing program later on. If the minutes from the BOE’s most recent meeting reiterate this, the British pound could pull back very sharply.

Canadian Dollar Gains Ahead of Upcoming Canadian CPI Report
USD/CAD fell further on Tuesday thanks to broad US dollar declines, leaving the pair within a range of 1.1500 – 1.1800. FXCM SSI, a contrarian indicator, shows that traders remain net long the pair by 1.87:1, suggesting we could see additional declines in the near term. However, USD/CAD faces high event risk on Wednesday. According to the Bank of Canada’s last Monetary Policy Report in April, the Bank is open to quantitative easing (QE) and credit easing if nominal interest rates start to fall below zero. Indeed, the Bank stated that while they could cut rates to zero in theory, it would ultimately “eliminate the incentive for lenders and borrowers to transact in markets, especially in the repo market.” As a result, inflation reports will be key to gauging whether the Bank of Canada will go the route of QE, but looking ahead to upcoming reports, this shouldn’t be the case and thus, the news shouldn’t be too market-moving. Headline CPI is projected to have risen 0.2 percent in April, leading the annual rate to slump to 0.6 percent, the lowest since November 2001. Meanwhile, core CPI is forecasted to have risen 0.1 percent during the month, leaving the annual rate down at 1.8 percent from 2.0 percent. All told, the Canadian dollar may only respond if CPI rises more than expected (CAD bullish), or if CPI contracts on a monthly bases and drags the annual rates of price growth much low (CAD bearish).

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com

US Dollar Slips Despite Increased Homebuilder Confidence, Mixed Comments by Treasury’s Geithner
The US dollar lost ground on Monday as increased risk appetite fed increased demand for FX carry trades, commodities like oil, and equities, as the S&P 500 ended the day up 3.04 percent at 909.71. While there weren’t any top tier economic indicators on hand, US news was generally optimistic. Indeed, Treasury Secretary Tim Geithner said in comments at the National Press Club that the credit markets are thawing, that the economy has “clearly stabilized” but remains “fragile,” and also said that unemployment may keep rising even if growth rebounds. Geithner went on to say that the government shouldn’t set caps on compensation and should instead focus on pay incentives, which must be tied to “long term factors” rather than encourage an increase in short-term risk. On the government’s massive budget deficit, Geithner noted that it would be the “defining challenge” of the next five years as the nation’s fiscal conditions is “unsustainable.”

Meanwhile, the National Association of Home Builders (NAHB) index rose to 16 in the month of May from 14, the highest since September, indicating that confidence amongst homebuilders is improving. That said, readings below 50 signal that the majority views conditions as remaining poor, suggesting that the US housing sector remains far from recovery. However, upcoming data may show signs of improvement for the month of April after staging a sharp deterioration in March. Indeed, the US Commerce Department’s housing starts index is projected to edge up to 520,000 from 510,000 while applications for building permits may increase to 530,000 from a record low of 516,000. Such moves would bode well for next week’s release of NAR existing home sales and Commerce Department’s new home sales, as the reports tend to correlate from month to month. Better-than-expected readings could offer a boost to risk appetite, which may ultimately benefit FX carry trades and stock market futures, while disappointing readings may lead to US dollar gains amidst flight-to-safety.

Euro Bounces Against Dollar, Yen, But Euro Crosses Remain Confined to Tight Ranges
The euro made headway against the US dollar and Japanese yen, as EUR/USD broke above 1.3540/45 and EUR/JPY bounced from rising trendline support on the daily charts. However, when it came to the rest of the majors, the currency was a laggard, with EUR/CHF backing off from falling trendline resistance at 1.5150 and EUR/GBP holding within a range of 0.8800-0.9025. Euro-zone economic data was better-than-expected, as the region’s trade deficit narrowed to 2.1 billion euros in March from 2.9 billion euros thanks to a 1.4 percent increase in exports. Adding to this, imports rose 0.6 percent, suggesting that both foreign and domestic demand are starting to improve, albeit at a very slow pace.

On Tuesday, the release of the German ZEW survey of investor sentiment for the month of May is anticipated to reflect mixed sentiment on current conditions and the economic outlook. Indeed, the index of sentiment on the current situation is forecasted to remain near 5-year lows at -90.0, up from -91.6 while the outlook is projected to rise to +20 from +13. This report can be market-moving for the euro on a very short-term basis upon release at 5:00 ET, with disappointing results likely to weigh on the currency. On the other hand, better-than-expected data could provide a bit of a boost for the euro.

British Pound Trading Below 1.5350 Ahead of Key UK CPI Report on Tuesday
The British pound tested last week’s highs against the US dollar near 1.5350, but with FXCM SSI showing that traders remain let long GBP/USD by a ratio of over 2:1, the contrarian indicator suggests an intermediate top may be in place (learn more about SSI at the end of last week’s update). Interestingly enough, event risk for GBP/USD will pick up tomorrow as the UK’s consumer price index (CPI) reading for the month of April is expected to rise 0.4 percent, the third straight increase. However, the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to fall to a more than one-year low of 2.4 percent from 2.9 percent, keeping inflation within the central bank’s acceptable range of 1 percent – 3 percent, but above their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further. On the other hand, if CPI holds strong, the currency could rally in response.

Japanese Yen Down as FX Carry Trades Surge – Watch for Japanese GDP on Tuesday Night
The Japanese yen was the weakest of the majors on a day that risk appetite lifted FX carry trades, making it all the more clear that fundamentals are not driving price action for currencies like the yen and the US dollar. This point could be highlighted tomorrow night, when Japan’s Cabinet Office will release preliminary growth readings. After three consecutive quarters of contraction, the outlook doesn’t look good. There are signs that businesses are suffering considerably at the hands of waning domestic and foreign demand. Consumers have very little to work with these days, as the jobless rate has slowly climbed to a nearly five-year high, and perhaps even worse, cash earnings growth contracted by 3.7 percent in March from a year earlier, the sharpest drop since 2002.  Meanwhile, Japanese exporters have had to grapple with not only slowing global growth, but also the appreciation of the Japanese yen, all of which has led foreign-bound shipments to tumble a whopping 46.5 percent in March from a year ago, according to figures published by the Ministry of Finance. As a result, a Bloomberg News poll of economists shows expectations for GDP to fall 4.3 percent in Q1, with the annualized rate forecasted to plummet by a record 16.1 percent.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com

US Dollar, Japanese Yen Slip as US Continuing Jobless Claims Reach New Highs, Ahead of US CPI
The US dollar and Japanese yen lagged behind the rest of the majors as increased risk appetite led US equities and FX carry trades higher. US economic data was mixed, as jobless claims surged beyond forecasts while the producer price index (PPI) rose in line with expectations. Initial jobless claims jumped by 32,000 during the week ending May 9 to 637,000 while continuing claims rocketed by 202,000 during the week ending May 2 to yet another record high of 6,560,000, suggesting that the slowing job losses we saw reflected in last Friday’s non-farm payrolls report may have only been temporary. Meanwhile, PPI rose 0.3 percent for the month of April as food costs jumped 1.5 percent. Excluding food and energy costs, PPI only rose a slight 0.1 percent, but despite these increases the annual rates of growth for both indices fell back. Indeed, headline PPI tumbled 3.7 percent from a year ago, marking the sharpest drop since January 1950, while core PPI slowed to a 9-month low of 3.4 percent. These numbers suggest that Friday’s US event risk should hit the wires in line with forecasts.

At 8:30 ET, the release of the April reading of the US consumer price index (CPI) is likely to highlight the ultra-slow pace of price growth in the US economy. Indeed, CPI is anticipated to have stagnated during the month, bringing the annualized pace to -0.6 percent – the lowest since January 1955 – from -0.4 percent. On the other hand, the core measure – which excludes volatile food and energy costs – is anticipated to rise 0.1 percent, leaving the annualized rate at 1.8 percent. Overall, the news is likely to add to concerns that the US is on a one-way track to deflation, a concern that has been cited by “a few” Federal Open Market Committee (FOMC) members, according to the latest FOMC meeting minutes. However, the markets may only respond to the news if core CPI starts to fall dramatically.

Related Article: Crowds Buy into US Dollar Weakness, Signaling Losses Likely

Swiss Franc Down After SNB Verbal Intervention – EUR/CHF Shows Potential for Break
The Swiss franc may have made headway versus the US dollar and Japanese yen, but the currency ended the day down against the commodity dollars, euro, and British pound after Swiss data pointed toward deflation and the Swiss National Bank verbally intervened in the market. At 3:15 ET, the Swiss producer and import price index unexpectedly slipped 0.2 percent for the month of April, dragging the annual rate down to a more than 22-year low of -3.6 percent from -2.8 percent. A breakdown of the report shows that the drop was due primarily to falling import costs, which is partially the result of the persistent appreciation of the Swiss franc, despite the SNB’s first intervention announcement on March 12. In fact, the SNB specifically said they would purchase foreign currency to limit the appreciation of the Swiss franc against the euro as the Euro-zone is Switzerland’s biggest trader partner.

Since then, though, EUR/CHF has retraced approximately 50 percent of the pair’s rally between March 10 and March 17, and perhaps in an effort to stop the decline, SNB Governing Board member Thomas Jordan said that the central bank was “implementing franc policy” and that the SNB wanted to prevent further franc appreciation.” Jordan also said that while it was hard to forecast, he saw a turning point for the Swiss economy in 2010 and noted that Swiss credit market conditions were still very good. That said, EUR/CHF has spent a lengthy amount of time consolidating within a very tight range. Indeed, the Bollinger Bands width is now at the lowest level since November 2007, which was followed by a rapid 300 point break lower, suggesting that EUR/CHF could be facing a break in the near-term as well, though the move has the potential to be bullish or bearish.

Euro, British Pound Consolidate Below Weekly Highs – Outlook May Hinge Upon Euro-zone Q1 GDP Release
The EUR/USD and GBP/USD pairs both spent much of Thursday consolidating below their weekly highs, but breakouts could occur in the near-term. Indeed, GBP/USD may be forming a short-term head and shoulders pattern, as the pair’s rally stalled at the 61.8 percent fib of 1.5353-1.5066 and the May 10 highs near 1.5242/50 (shoulders). Meanwhile, EUR/USD may be forming its own head and shoulders pattern, with the shoulders sitting at 1.3665 and the neckline looming below at 1.3555.

In 2008, the release of Euro-zone CPI drew significant attention and sparked major volatility for the euro. However, indicators of growth have become more important, as the European Central Bank has shifted its focus away from inflation and on to the global and regional economic slowdown. As a result, traders should keep an eye on the advanced reading of Q1 GDP, which is forecasted to contract for the fourth straight quarter, this time at a rate of -2.0 percent, compared to -1.6 percent in Q4 2008, while the year-over-year rate could fall by a whopping 4.1 percent. Such data would indicate that the Euro-zone’s recession deepened into the start of 2009, and would only raise the odds that the ECB will consider cutting rates further or will need to take more drastic steps than their current plan to buy 60 billion euros worth of covered bonds, and the news could trigger steep losses for the euro. On the other hand, better-than-expected results could lead EUR/USD to continue its rally toward 1.4000.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com