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Forex: Euro Rallies As EU Considers Second Bailout For Greece, U.S. Dollar Mixed Ahead Of North American Trade

Forex: Euro Rallies As EU Considers Second Bailout For Greece, U.S. Dollar Mixed Ahead Of North American Trade

2011-05-31 12:30:00
David Song, Currency Strategist
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Talking Points

  • Euro: Greece Looks For Second Bailout, Inflation Slows
  • British Pound: Range-Bound Price Action Ahead
  • U.S. Dollar: Consumer Confidence On Tap

Talks of a second bailout for Greece push the Euro to 1.4423 on Tuesday, and the rebound in the single-currency may gather pace in the following month as the European Central Bank maintains a hawkish outlook for monetary policy. Euro Group President Jean-Claude Juncker said the EU may announce additional aid for Greece by the end of June in order to avoid restructuring Greece’s government debt, while Fitch Ratings expects to see continued support for the ailing country as the region remains unable to tap the financial markets. As fears surrounding the sovereign debt crisis ease, the EUR/USD may continue to pare the sharp decline from earlier this month, and the exchange rate may work its way back towards the highs seen earlier this month as the ECB talks up speculation for higher borrowing costs in Europe.

Governing Council member Mario Draghi said there’s a ‘greater need’ to normalize monetary policy further given the heightening risk for inflation, and went onto say that the ongoing turmoil within the European Financial system will not ‘divert’ the central bank from moving on interest rates as it maintains its one and only mandate to ensure price stability. As the ECB toughens its stance against inflation, market participants expect to see borrowing costs in Europe to increase by 75bp over the next 12-months according to Credit Suisse index swaps, but we may see central bank President Jean-Claude Trichet continue to soften his hawkish tone for monetary policy as price growth in the euro-area weakens for the first time this year. In light of the recent developments, the Governing Council may look to carry its wait-and-see approach into the second-half of the year, and the board may have little choice but to delay its exit strategy further as the economic outlook remains clouded with high uncertainty.

The British Pound struggled to maintain the rally to 1.6545, but the sterling may regain its footing during the North American session as currency traders increase their appetite for risk. However, the GBP/USD could face additional selling pressures over the next 24-hours of trading as the economic docket is expected to reinforce a weakened outlook for the U.K. As the economic recovery in Britain cools, the Bank of England is widely expected to retain its current policy in June, and dovish comments from the central bank will certainly weigh down on the exchange rate as investors scale back speculation for a rate hike in 2011. In turn, the rebound in the GBP/USD may taper off heading in the following month, and the pair may trade within a broad range ahead of the next BoE interest rate decision on June 9 as currency traders weigh the prospects for future policy.

U.S. dollar price action was largely mixed during the overnight trade, but the rebound in risk could foster selling pressures for the reserve currency as investors increase their appetite for yields. However, the slew of data scheduled for the North American session may bear down on market sentiment as manufacturing in the world’s largest economy is expected to slow in May, but currency traders may show a greater reaction to the Conference Board’s consumer confidence survey as private sector spending remains one of the leading drivers of growth. In turn, a mixed batch of data could spark choppy price action across the major currencies, but we should ultimately see risk trends continue to dictate price action in the foreign exchange market as the U.S. dollar benefits from safe-haven flows.

Has the EUR/USD Started A Downward Trend? Join us in the Forum

Related Articles: Weekly Currency Trading Forecast

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

FX Upcoming

Currency

GMT

EDT

Release

Expected

Prior

CAD

12:30

08:30

Industrial Production (MoM) APR

0.7%

0.9%

CAD

12:30

08:30

Raw Materials Price Index (MoM) APR

3.0%

5.7%

CAD

13:00

09:00

Bank of Canada Rate Decision (May 31)

1.00%

1.00%

USD

13:00

09:00

S&P Case Shiller 20-City (MoM%) MAR

-0.20%

-0.18%

USD

13:00

09:00

S&P Case Shiller Composite-20 (YoY) MAR

-3.40%

-3.3%

USD

13:00

09:00

S&P Case Shiller Home Price Index MAR

--

139.27

USD

13:00

09:00

S&P Case Shiller US Home Price Index Q1

--

130.38

USD

13:00

09:00

S&P Case Shiller US Home Price Index (YoY) Q1

--

-4.1%

USD

13:45

09:45

Chicago Purchasing Manager MAY

62.0

67.6

USD

14:00

10:00

Consumer Confidence MAY

66.5

65.4

USD

14:00

10:00

NAPM –Milwaukee MAY

60.5

68

USD

14:30

10:30

Dallas Fed Manufacturing Activity MAY

8.0

10.5

Currency

GMT

Release

Expected

Actual

Comments

JPY

23:15

Markit/JMMA PMI Manufacturing MAY

--

51.3

Expands for the third time this year

CNY

23:20

Leading Index APR

--

102.11

Highest since October

JPY

23:30

Household Spending (YoY) APR

-2.7%

-3.0%

Contracts for the seventh month

JPY

23:30

Jobless Rate APR

4.7%

4.7%

Rises for t he first time since September

JPY

23:30

Job-to-Applicant Ratio APR

0.62

0.61

JPY

23:30

Industrial Production (MoM) APR

2.2%

1.0%

Increases for the second time this year.

JPY

23:30

Industrial Production (Yoy) APR

-12.4%

-14.0%

NZD

01:00

NBNZ Activity Outlook MAY

--

39.7

Highest since June 2010

NZD

01:00

NBNZ Business Confidence MAY

--

38.3

AUD

01:30

Current Account Balance Q1

-10000M

-10447M

Largest deficit since 2010

AUD

01:30

Private Sector Credit (MoM) APR

0.5%

0.0%

Holds flat for the first time since September

AUD

01:30

Private Sector Credit (YoY) APR

3.8%

3.3%

AUD

01:30

Australia Net Exports of GDP Q1

-1.1

-2.4

First decline since 3Q 2010

AUD

01:30

Building Approvals (MoM) APR

-1.8%

-1.3%

Weakens for the third time this year

AUD

01:30

Building Approvals (YoY) APR

-12.7%

-11.5%

JPY

01:30

Labour Cash Earnings (YoY) APR

-0.2%

-1.4%

Falls for the second month.

NZD

03:00

Money Supply M3 (YoY) APR

--

5.7%

Fastest pace of growth since May 2009

JPY

04:00

Vehicle Production (YoY) APR

--

-60.1%

Hits record low

JPY

05:00

Construction Orders (YoY) APR

--

31.4%

Rebounds from contraction in March

JPY

05:00

Housing starts (YoY) APR

-3.0%

0.3%

Rebounds from contraction in March

CHF

05:45

GDP Q1 (QoQ)

0.7%

0.3%

Slowest growth since exiting recession in 2009

CHF

05:45

GDP Q1 (Yoy)

3.0%

2.4%

Slowest growth since Q1 2010

EUR

06:00

German Retail Sales (MoM) APR

1.8%

0.6%

Rebounds from sharp decline in March

EUR

06:00

German Retail Sales (YoY) APR

1.5%

3.6%

CHF

06:00

UBS Consumption Indicator APR

--

1.585

Eases off 4-month high

EUR

06:45

French Producer Prices (MoM) APR

0.8%

0.8%

Growth at steady levels

EUR

06:45

French Producer Prices (Yoy) APR

6.4%

6.4%

Eases off 30-month high

EUR

06:45

French Consumer Spending (MoM) APR

-0.3%

-1.6%

2nd consecutive contraction

EUR

06:45

French Consumer Spending (Yoy APR

3.7%

1.2%

Slowest since Dec ‘10

EUR

07:55

German Unemployment Change MAY

-30K

-8K

Smallest drop since Dec ‘10

EUR

07:55

German Unemployment Rate MAY

7.1%

7.0%

Hits fresh record low

EUR

08:00

Italian Unemployment Rate APR

8.3%

8.1%

Continues to fall

EUR

09:00

Euro-zone CPI Estimate (YoY) MAY

2.8%

2.7%

Eases off multi-year high

EUR

09:00

Euro-zone Unemployment Rate APR

9.9%

9.9%

Remains unchanged for 3rd month

EUR

09:00

Italian CPI (MoM) MAY

0.2%

0.1%

Eases off record high in April

EUR

09:00

Italian CPI (YoY) MAY

2.6%

2.6%

Unch for 2nd month

EUR

09:00

Italian PPI (MoM) APR

0.9%

0.6%

Lowest since Nov ‘10

EUR

09:00

Italian PPI (Yoy) APR

5.5%

5.5%

Lowest since Jan

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