Euro Continues To Trend Sideways, British Pound Extends Rally

Talking Points
•    Japanese Yen: Continues to Benefit From Risk Aversion
•    Pound: Extends Short-Term Rally
•    Euro: New Industrial Orders Expand At Slower Pace
•    U.S. Dollar: Durable Goods Orders on Tap

Meanwhile, European Central Bank President Jean-Claude Trichet said that the austerity measures carried out by the governments operating under the fixed-exchange rate system does not “strangle” the economic recovery in Europe, and went onto say that inflation expectations remain “remarkable well anchored” during an interview with an Italian newspaper.

At the same time, Governing Council board member Erkki Liikanen argued that credit rating agencies “need to be registered and supervised” in a paper for the Finnish Institute for International Affairs as the debt crisis weighs on the stability of the euro, and stated that economic activity “will not return to pre-crisis levels for many years” as policy makers plan to tighten fiscal policy going forward. As a result, the ECB is widely anticipated to maintain a loose policy stance in the second-half of the year as it aims to encourage a sustainable recovery, and the central bank may look to support the economy going into 2011 as the region faces an “uneven” recovery paired with subdued price growth. Meanwhile, industrial new orders in the Euro-Zone increased 0.9% in April, which fell short of expectations for a 1.6% expansion, but marked the third consecutive rise as global trade conditions improve.

The British Pound extended the two-day advance and rose to a high of 1.5011 during the European trade, but the short-term rally appears to be tapering off ahead of the 100-Day SMA at 1.5048 as the daily RSI approaches overbought territory. However, the shift in the central bank’s rhetoric paired with the stickiness in consumer prices may continue to drive the exchange rate higher as inflation becomes an increasing concern, and speculation for a rate hike later this year could lead the sterling to retrace the decline from April as investors weigh the prospects for future policy. Meanwhile, former Chancellor of the Exchequer Alistair Darling said that the Bank of England must stay away from the political area and should “be seen to be” above politics while speaking in London, and stated that the U.K. budget “would be leaked in minutes” if the Treasury decided to send the documents to the European Union before handing it over the Parliament.

The greenback strengthened against most of its major counterparts, while the USD/JPY extended the previous day’s decline to reach a fresh weekly low of 89.24 as the low-yielding currency continued to benefit from the rise in risk aversion, but the fundamental developments scheduled for the North American session could spark a shift in market sentiment as investors weigh the prospects for a sustainable recovery in the world’s largest economy. Demands for U.S. durable goods are expected to contract 1.4% in May following a 2.9% expansion in the previous month, while orders excluding transports are forecasted to increase 1.0% after unexpectedly falling 1.0% in April, and the mixed data could produce choppy price action in the major currencies as the outlook for future growth remains clouded with uncertainties.

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