Talking Points

• Dollar, Yen to Extend Gains as S&P 500 Futures Point to Risk Aversion
• European Commission Forecasts May Compound Negative Sentiment
• UK PPI Drop May Weigh on British Pound as Traders Rethink BOE Bets

The US Dollar and Japanese Yen advanced against their major counterparts overnight as Asian stocks declined, boosting demand for the go-to haven currencies. The MSCI Asia Pacific benchmark index fell close to 1 percent, with pressure from news that JPMorgan suffered a hefty $2 billion trading loss in synthetic credit securities that proved to be riskier than expected compounded by deeply disappointing Chinese industrial production figures. S&P 500 stock index futures are trading sharply lower, hinting more of the same is likely ahead amid continued risk aversion.

The economic calendar is relatively quiet in European hours. The final revision of April’s German CPI reading is expected to keep headline inflation at 2 percent, unchanged from initial estimates. Barring a significant deviation from expectations, traders are likely to look ahead to an updated set of economic growth projections from the European Commission after yesterday’s ECB monthly report painted a dour picture.

Professional forecasters polled by the central bank slashed their bets on economic growth but upgraded the outlook for inflation in 2012 and 2013, hinting at that the ECB will not be quick to offer stimulus even as slump deepens. If the Commission’s estimates strike a similar tone, the outcome may prove negative for overall risk appetite (and thereby for stocks-linked currencies) considering the Eurozone recession presents the most significant headwind facing global output.

UK PPI figures are expected to show wholesale inflation slowed to 2.9 percent in April, the weakest since November 2009. The result may weigh a bit on the British Pound, hinting that easing price pressure in the pipeline will translate into lower headline consumer prices in the months ahead, giving the Bank of England room to reconsider additional easing after the economy entered into a technical recession in the second quarter. Policymakers shied away from topping up asset purchases yesterday, presumably on inflationary concerns.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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

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