British Pound Weakens Ahead of U.K. Budget Statement, Euro Extends Previous Day’s Decline

Talking Points
•    Japanese Yen: Rallies Across the Board on Risk Aversion
•    Pound: Weakens Ahead of Budget Statement
•    Euro: Greek Prime Minister Says Cuts Will Overcome Skepticism
•    U.S. Dollar: Existing Home Sales, Treasury Secretary Geithner on Tap

Meanwhile, a spokesman for the U.K. Treasury pledged that the government will balance public finances “within five years” and said that the budget is “tough but fair” as the new coalition aims to target the ballooning deficit, and went onto say that the “richest will contribute the most” as households continue to face tightening credit conditions paired with the deterioration in the labor market.

Market participants speculate Mr. Osborne will increase taxes for the rich while reducing the burden for low-income families, and is expected to retain infrastructure spending in order to counter the ongoing weakness in the private sector. Nevertheless, as Prime Minister David Cameron aims to tighten fiscal policy and cut the budget deficit, former Bank of England economist Danny Gabay said that the new leader would have to “deliver a plan that will hold the coalition together, have the support of the electorate and satisfy the markets” as the economic outlook remains clouded with uncertainties, while former Chancellor of the Exchequer Alistair Darling argued that the government is neglecting the risks for a debt crisis as policy makers continue to see a risk for a protracted recovery. As

The Euro weakened against the greenback for the third day and fell to 1.2264 during the overnight trade following a shift in market sentiment, and the single-currency looks poised to test the 20-Day SMA at 1.2200 for short-term support as investors scale back their appetite for risk. Bank of Spain Governor Miguel Angel Fernandez Ordonez said that savings banks within the region could get around EUR 10B from the nation’s bank rescue fund knows as the FROB, and went onto say the central bank will announced the results of the stress test as soon as possible while speaking to lawmakers in Madrid. At the same time, the economic docket showed business confidence in Germany unexpectedly increased in June, with the IFO survey advancing to 101.8 from 101.5 in the previous month, while the gauge for future expectations slipped to 102.4 from 103.7 in May amid forecasts for a drop to 102.7. As governments operating under the fixed-exchange rate system struggle to manage their public finances, with policy makers continue to see a uneven recovery, the European Central Bank is likely to support the economy in the second-half of the year as it aims to balance the risks for region.

U.S. dollar price action was mixed during the European trade, with the USD/JPY paring the previous days advance to a reach a low of 90.52 overnight, and the greenback is likely to face increased volatility in the North American session as the economic docket is expected to reinforce a mixed outlook for future growth. Existing home sales in the world’s largest economy is expected to increase 6.0% to an annualized pace of 6.12M in May from 5.77M in the previous month, while the home price index is expected to increase 0.3% for the second consecutive month in April. At the same time, the Richmond Fed Manufacturing index is projected to fall back to 20 in June from 26 in the month prior as businesses keep a lid on production, while Treasury Secretary Timothy Geithner is scheduled to testify in front of the Congressional Oversight Panel for TARP at 14:00 GMT.

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Forex Weekly Trading Forecast – 06.21.10

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