Dollar and Yen at Risk as Sentiment Steadies, Pound May Rise on IP Data

Talking Points

• US Dollar, Japanese Yen Correct Lower as Markets Digest Previous Day’s Volatility
• British Pound May Find Support as UK Industrial Production Trend Improves in April
• ECB Financial Stability Review May Stoke Debt Crisis Fears as Greek Election Looms

The US Dollar and Japanese Yen declined against their top counterparts in overnight trade in what appeared to be a correction following whipsaw price action over the preceding 24 hours. Indeed, the pullback in the two go-to safe haven currencies found no catalyst in Asian stock performance, where shares followed Wall Street lower. Sentiment was initially buoyed by news of Spain’s bank-sector bailout yesterday only to reverse course midday and force risky assets into negative territory. S&P 500 stock index futures now point generously higher to hint refuge currencies are likely to remain under pressure, but betting on follow-through seems clearly dangerous in the current environment.

UK Industrial Production figures headline the data calendar, with expectations pointing to a narrow 0.1 percent monthly increase in April. Looking past month-to-month volatility, the annualized reading is expected to see output contract 1 percent compared with April 2011, marking the smallest negative print in nine months. The outcome may downgrade additional Bank of England stimulus expectations and boost front-end yields, offering support to the British Pound. Indeed, the correlation between GBPUSD and the 5-year UK bond yield now stands at the highest in seven months (0.69 on 20-day percent-change studies). The bi-annual ECB Financial Stability Review report is also due to cross the wires. While traders are unlikely to be particularly surprised by the risks that the central bank will probably identify, the possibility for a strong reaction seems nonetheless significant given the proximity of the much-feared Greek election on June 17.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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