Euro Holds Ground Despite the Unexpected Drop in Core CPI, British Pound Falls Back Below 1.6400

Talking Points
•    Japanese Yen: BoJ Holds Rate, Extends Credit-Easing Program
•    Pound: Jobless Claims Tips Higher From May
•    Euro: CPI Core Unexpectedly Falls in June
•    US Dollar: CPI and FOMC Minutes on Tap

Euro Holds Ground Despite the Unexpected Drop in Core CPI, British Pound Falls Back Below 1.6400

The EUR/USD surged higher during the overnight trade despite the unexpected drop in the Euro-Zone Core CPI reading for June, and the pair may continue to retrace the decline from earlier this month as market sentiment improves. As a result, we may see the euro make another attempt to push back above 1.4100 over the next few hours of trading as equity futures foreshadow a higher open for the U.S. market.

Consumer price in the Euro-Zone slipped 0.1% from the previous year to mark the first decline since comparable records began in 1996, while the core rate of inflation unexpectedly dropped to an annual rate of 1.4% from 1.5% in May, and the outlook for price growth remains weak as economic activity falters. Despite the downtick in the core CPI, the EUR/USD remained supported and continued to hold a narrow range during the last hour of trade, and the pair may hold above 1.4000 over the remainder of the week as the economic docket for the Euro-Zone remains fairly light.

The British pound advanced for the third day this week and rose to an intraday high 1.6408 during the Asian trade however, the GBP/USD continued to lose ground throughout the European session despite the less-than-expected rise in U.K. jobless claims. Unemployment claims rose 23.8K to a 12-year high of 1.56M in June, which was less than the 41.3K rise forecasted by economists, while the ILO unemployment rate  surged to an annual rate of 7.6% during the three-months through May, which is the highest since 1995. At the same time, BoE Deputy Governor Charles Bean maintained a dour outlook for future growth as he expects the downturn in the banking sector to weigh on the real economy ‘for some time,’ and went onto say that the central bank may raise the ceiling on its asset purchase program by a ‘reasonable amount’ if needed. Nevertheless, the rise in risk appetite may continue to drive the GBP/USD higher throughout the remainder of the trading session, and we may see the pair continue to retrace the sell-off from earlier this month as investors anticipate the central bank to tighten policy over the next 12 months.

The greenback continued to lose ground throughout the European trade following the rise in risk appetite, and the low-yielding currency may continue to face increased selling pressures over the next 24 hours trading as global equity prices push higher. At the same time, U.S. consumer prices are expected to rise 0.6% in June while the annual rate of inflation is projected to fall 1.5% from the previous year, and the drop in price growth could drag on the dollar as the FOMC maintains a dovish policy stance. Meanwhile, the Fed minutes are scheduled for release at 18:00 GMT today, and the comments from the central bank is likely to spur volatility in the currency market as investors weigh the outlook for future policy. In addition, industrial outputs and manufacturing activity are expected to fall at a slower pace in the second half of the year, while the capacity utilization rate is anticipated to fall to a record-low of 67.9% in June.


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Forex Trading Weekly Forecast - 07.13.09

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