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Euro Weighed by ECB Comments, British Pound Bounces Back

By , Currency Analyst
31 May 2010 10:53 GMT

Talking Points
•    Japanese Yen: Depreciates Across The Board
•    Pound: House Values Increase For 10th Month
•    Euro: Confidence Falters, CPI Estimate Advances
•    Canadian Dollar: 1Q GDP, Industrial Produce Price on Tap


ECB President Jean-Claude Trichet said that the central bank will not tolerate ballooning deficits and expects “strict respect for the principle of budgetary discipline” from the governments operating under the single-currency, and said that its asset “purchases made on the secondary market cannot be used to circumvent the fundamental principle of budgetary discipline” during a speech in Vienna.

At the same time, the central bank head argued that the “euro’s capacity to maintain its value is absolutely essential for the confidence of investors both inside and outside of the euro-area,” and went onto say that growth in the second quarter could be “slightly higher than expected” as the economic recovery gathers pace. In addition, Governing Council member Axel Weber said that the central bank’s bond purchasing program cannot exceed “tightly defined limits” while speaking in Mainz, Germany, and went onto say that he remains critical of the extraordinary measures “given the stability risks they entail.” Nevertheless, the economic docket showed the CPI estimate increased to an annualized pace of 1.6% in May, which was just shy of expectations for a 1.7% rise, but still marked the fastest pace of growth since December 2008. Moreover, the gauge for economic confidence unexpectedly slipped to 98.4 during the same period after climbing to a two-year high of100.6 in April, while business sentiment increased to 0.34 from 0.28 in the previous month to mark the highest reading since May 2008.

The British Pound bounced back during European trade to reach a high of 1.4516, but the lack of momentum to push above the 20-Day SMA at 1.4623 may keep the exchange rate within a narrow range as investors weigh the prospects for future policy. According to an article in the Guardian newspaper, the British Chambers of Commerce said the U.K. government should leave fiscal tightening on the backburner as the debt crisis in the Euro-Zone intensifies, and went onto say that the Bank of England should support the economy in the second half of the year as the recovery is likely to remain fragile. Nevertheless, a report by Hometrack showed home values increased for the 10th consecutive month in May, with the index advancing 0.2% from the previous month, while prices rose at an annualized pace of 2.0% to post the fastest pace of growth since January 2008. As economic conditions improve, the BoE may look to increase its economic assessment for future growth, but the ongoing slack within the private sector could lead the central bank to maintain a dovish bias for monetary policy as Governor Mervyn King aims to encourage a sustainable recovery for the U.K.

The greenback weakened against most of its major counterparts as investors increased their appetite for risk, while the USD/JPY rallied to a high of 91.60 as the Japanese Yen slipped lower across the board. As the U.S. market remains offline for the Memorial holiday, thin market conditions may keep the major exchange rates within its current range on Monday however, we may see increased volatility in the Canadian dollar as the economy is expected to expand 5.9% in the first-quarter, which would be the fastest pace of growth since the fourth-quarter of 1999. However, price pressures in Canada are expected to weaken in April as economists forecast the industrial product price index to fall 0.2% after contracting 0.4% in March, while the gauge for raw materials is expected to advance 1.4% following the 0.8% expansion in the previous month.

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Forex Weekly Trading Forecast - 05.31.10

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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31 May 2010 10:53 GMT