Talking Points

• US Dollar, Japanese Yen Outperform as New Greek Elections Spark Risk Aversion
• British Pound Looks Past Jobless Claims Data, Focusing on BOE Inflation Report
• Slower Eurozone CPI May Compound Euro Selling on ECB Easing Expectations
• FOMC Meeting Minutes May Dent QE3 Expectations, Adding Fuel to Dollar Rally

The US Dollar and Japanese Yen pushed broadly higher overnight as stock prices collapsed, boosting demand for the go-to safe haven currencies. The MSCI Asia Pacific regional benchmark equity index slumped 2.5 percent as continued gridlock in Greece spurred the country’s lawmakers to call for new elections, which traders fear may produce a ruling majority for anti-austerity parties (and in particular, Syriza). This threatens to lead Athens to renege on its obligations under the EU/IMF bailout agreement, which may ultimately see the country leave the Eurozone and possibly even the wider EU. Stock index futures tracking key European and US equity benchmarks are pointing sharply lower, arguing for continued risk aversion ahead.

The Bank of England Inflation Report headlines the economic calendar, with traders looking to the document as the primary guide for policy expectations in the coming three months. Minutes from April’s BOE sit-down showed it’s theretofore most dovish voice – Adam Posen – withdrew his long-standing call for more QE amid concerns about sticky core inflation. If Mr. Posen believes this overshadows the UK economy’s descent into recession, other less-dovish members of the committee may do so as well. Confirmation that this is indeed the case is likely to prove supportive for the British Pound, boosting front-end yields and scattering dilution fears.

Elsewhere, UK Jobless Claims figures are due to show applications for benefits rose by 5,000 in April, putting the Claimant Count (a proxy for the unemployment rate) at 5 percent for the first time since September 1997. While the outcome certainly appears ominous, its negative implications for Sterling may prove limited unless it is perceived to carry meaningfully dovish implications for BOE policy (which brings the focus back to the Inflation Report, as noted above). Eurozone CPI figures are due to show headline inflation slowed to 2.6 percent in April, the lowest in eight months. The outcome may compound already significant downward pressure on the Euro as easing price growth is perceived to give the ECB room to ease monetary policy.

Later in the day, the spotlight shifts to the Federal Reserve as the central bank publishes minutes from the late-April policy meeting. As we discussed previously, markets seized on Chairman Bernanke saying policymakers were “prepared to do more” to help the economy if growth faltered, singling out additional QE as still “on the table”, pushing the Dollar lower in the announcement’s aftermath. However, the Fed chief likewise said that it would be “very reckless” to allow higher inflation for the sake of reducing unemployment while his colleagues upgraded bets on US jobs, employment and price growth. With that in mind, the greenback may find added support if that side of the story reemerges in the minutes and finally gets its chance to be thoroughly priced in.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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

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