Euro, British Pound Hold Tight Range Ahead of U.S. 1Q GDP Report

Talking Points
•    Japanese Yen: Mixed Against the Majors
•    Pound: BoE Holds Cautious Outlook for Financial System
•    Euro: German Import Prices Rise The Most in 10-Years
•    U.S. Dollar: 1Q GDP, U. of Michigan Confidence on Tap

Meanwhile, Greek Finance Minister George Papaconstantinou pledged to “strengthen common European economic policies and governance” during an interview with Athens News and said that the nation is “well within” its 2010 budget target as the government tightens fiscal policy and scales back on government spending.

At the same time, European Central Bank board member Ewald Nowotny said that Greece has taken the “right measures” and noted that it remains imperative that the governments operating under the single currency to curb their “debt dynamic,” and he went onto say that the European bank stress test is aimed to restore confidence in the financial system in a report published by Austria’s central bank. The report said that “the most recent stress tests the Austrian Nation Bank conducted in the spring 2010 show an improvement from the fall 2009 results, but Austrian banks’ capitalization has remained comparatively low,” and argued that “the ongoing structural adjustment measures in the Austrian banking sector must be continued” as the financial system remains fragile. As a result, the ECB is likely to support the economy in the second-half of the year and may look to loosen monetary policy further over the coming months in an effort to stem the downside risks for the region. Nevertheless, the economic docket showed import prices in Germany jumped 0.6% in May to top forecasts for a 0.2% rise, while the annualized rate increased 8.5% from the previous year to mark the fastest pace of growth in a decade.

The British Pound slipped to a low of 1.4855 during the European trade as the Bank of England maintained a cautious outlook for the economy, but the GBP/USD appears to be finding intraday support as price action holds above the 50-Day SMA at 1.4810. The BoE said “if sovereign risk concerns rise or risk appetite continues to diminish, asset prices could fall further” in its semiannual financial stability report, and argued that the result would “have a significant impact on the solvency positions of holders of these assets, including both U.K. and global banks.” In addition, the central bank noted that “the seep with which Greece’s problems were transmitted to other counties and markets highlighted persistent fault lines in the global financial system, and concluded that “U.K. banks face a number of challenges” along with “increased counterparty credit risk on exposures to other European banks.” As the financial sector remains weak, the MPC may hold a loose policy stance over the coming months in an effort to support the economy, but mounting price pressures could lead the central bank to switch gears in the second-half of the year as price growth holds above the 3% limit for inflation.

The greenback gained ground against most of its major counterparts, with the USD/JPY paring the decline from earlier this week to reach a high of 89.76, and the reserve-currency may fail to react to the economic events lined up for the North American session as we get the last 1Q GDP print, along with the final U. of Michigan consumer confidence reading for June. Economic activity in the world’s largest economy is expected to expand 3.0% in the first-three months of 2010, with personal consumption forecasted to increase 3.5% during the same period, while the gauge for household sentiment is projected to hold steady at 75.5 from 73.6 in May.

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