Talking Points

• British Pound May Rise as BOE Holds Back Stimulus Despite UK Recession
• ECB Monthly Report Carries Downside Risks for Euro, Risk Appetite Trends
• Dollar and Yen Correct Lower, Aussie Outperforms on Jobs Data Overnight

The Bank of England policy announcement headlines the European economic calendar. Expectations suggest Mervyn King and company will stick with the status quo, keeping the target lending rate at 0.5 percent and holding off from expanding asset purchases beyond £325 billion. Importantly, today’s decision will be made on the basis of an updated quarterly inflation report – a document to be made available publicly next week – meaning it is likely to be representative of where the central bank plans to take policy over the coming three months. This means that staying on hold here could prove supportive for the British Pound, signaling that inflation concerns that emerged in minutes from April’s BOE sit-down are likely to trump growth concerns for the time being despite the UK entering a technical recession in the first quarter.

Separately, the European Central Bank will publish May’s monthly report, which this time around will include the quarterly survey of professional forecasters. Traders will look to the document to inform their outlook for the depth of the economic slump plaguing the Eurozone as well as gauge the likelihood of additional ECB stimulus emerging in the near term. Considering the European downturn presents the most significant headwind facing global growth this year, a particularly dour report has scope to carry negative implications for the Euro as well as risk appetite at large.

The US Dollar and Japanese Yen sold off overnight as prices corrected after two days of gains. The Australian Dollar outperformed after April’s Employment report unexpectedly showed the economy added 15,500 jobs while the jobless rate fell to 4.9 percent, the lowest in a year. Details of the report proved less supportive than the headline number would suggest. The increase in hiring came entirely from part-time jobs while full-time employment declined by 10,500 and at least some of the decline in the unemployed owed to a shrinking labor force, with the participation rate dropping to 65.2 percent.

Still, the figures proved sufficient to trim bets on another RBA rate cut in June. Priced-in expectations now point to a 63 percent probability of a 25bps reduction in benchmark borrowing costs next months compared with 90 percent before the jobs data crossed the wires. China’s Trade Balance figures capped the Aussie’s advance however as imports registered at near-standstill while exports grew at the slowest pace in three months, stoking fears of a slowdown in Australia’s top overseas market. S&P 500 stock index futures are pointing higher in late Asian trade, hinting stocks-linked currencies may continue to recover against the safe-haven field.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com