British Pound Fails To Maintain Overnight Rally, Euro Weighed by Risk Aversion

Talking Points
•    Japanese Yen: Rallies on Risk Aversion
•    Pound: Mortgage Approvals Increase in May
•    Euro: ECB Pledges Not To Provide Funds To Troubled Banks
•    U.S. Dollar: Risk Sentiment To Dominate Price Action

At the same time, risk aversion seems to be flowing back into the markets as equity futures now point to a lower open for the U.S. market, and the shift in market sentiment may continue to drive the exchange rate lower throughout the North American session as the greenback benefits from the rise in safe-haven flows.
   
Nevertheless, the sterling is widely expected to face increased volatility over the following week as the new coalition is scheduled to release its budget statement on Tuesday, while the Bank of England will publish its policy meeting minutes on Wednesday at 8:30 GMT, and a shift in fiscal policy could weigh on the outlook for future growth as Prime Minister David Cameron pledges to cut the budget deficit and scale back on public spending. Meanwhile, a report by the Office for National Statistics showed public sector net borrowing grew less-than-expected in May, with the shortfall coming in at GBP 16.0B amid forecasts for a GBP 18.0B deficit, and public finances in the U.K. are likely to improve going forward as the new government aims to tighten fiscal policy. At the same time, a separate report by the BoE showed mortgage approvals by the major banks in Britain increased 51K in May, which exceeded projections for a 50K rise, and the central bank may look to support the economy throughout the second-half of the year as Governor Mervyn King continues to see a “substantial” amount of slack within the private sector.

The Euro was little changed overnight, with the exchange rate falling back from a fresh weekly high of 1.2416 to a low of 1.2357, and the single-currency may continue push lower throughout the day as investors scale back their appetite for risk. Meanwhile, European Central Bank President Jean-Claude Trichet reiterated that the interest rate remains “appropriate” and stated that the Governing Council has not changed its stance on monetary policy as it maintains its one and only mandate to ensure price stability, and went onto say that the bond purchase program is “time-bound in nature” during a speech in Moscow. At the same time, ECB board member Jose Manuel Gonzalez-Paramo said that the Governing Council will “collaborate in the coordination” of the commercial bank stress tests as the Austrian central bank announced it will publish its results on June 25, and went onto say that the board will “absolutely not” provide trouble banks with funds while speaking with reporters in Malaga, Spain. Nevertheless, the economic docket showed producer prices in Germany advanced 0.3% in May to top forecasts for a 0.1%, while the annualized rate expanded 0.9% from the previous year, led by a rise in energy costs.

U.S. dollar price action was mostly higher against most of its major counterparts, while the USD/JPY pared the overnight advance and slipped to a low of 90.61 as the Japanese Yen rallied across the board, and risk trends are likely to dictate price action throughout the day as the economic docket remains fairly light for Friday. Nevertheless, demands for Canadian assets are expected to increase C$2.5B in April after contracting C$0.6B in the previous month, while the leading indicator is forecasted to increase 0.7% in May after expanding 0.9% in the month prior.

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