The Euro fell below 1.5530 on weaker than expected German employment data. Jobless claims fell a mere 7K against expectations of 30K, as Europe’s largest economy start to show signs of weakening. Despite the EZ CPI-estimate easing to 3.3% and business confidence falling to a 2 ½ year low of 97.1, the Euro eventually found a bid tone and has started to consolidate ahead of the FOMC rate decision. Although inflation has eased a bit, it still remains at extremely high levels and will remain a concern for the ECB going forward.

The BoJ left their benchmark rate unchanged at 0.50%, with new Governor Shirakawa noncommittal on future policy bias. The central bank head said that the MPC will remain flexible in its decision making and had no current slant toward subsequent decisions. Policy makers would warn that the downside risks to the economy were greater than the upside, which was reinforced by Japanese industrial production falling at its fastest pace in five years at -3.1% in March. However, the central bank also sees inflation rising 0.8% to 1.0% for the year and reiterated its belief that keeping interest rates low provides long-term risks, increasing speculation that the next policy move will be a rate hike.  The remarks provided some selling pressure on the USD/JPY before the pair retraced above the 1.40 handle.

U.K. consumer confidence fell to the lowest level since 1992 according to the Gfk survey which fell to -24. The deteriorating housing market continues to weigh on the economy as house prices reported their first annual decline since 1996. According to Nationwide Building Society prices fell another 1.1% in April dragging the annualized rate to -1.0%.  BoE committee member and perennial dove David Blanchflower warned that “We face a real risk that the U.K. may fall into a recession, and aggressive action is required to prevent this from happening”

The upcoming Q1 GDP numbers and the FOMC rate decision may put the dollar on a long-term path. Expectations are that the U.S. economy grew by 0.5%, signaling the economy hasn’t dipped into a recession yet. The key to the number will be whether companies have been building inventories or have they sold through goods to the consumer. The major event risk on the day is the Fed rate decision, with the MPC expected to cut rate s by 25 bps and signal a pause to their current easing policy. However, speculation has increased that Chairman Bernanke may heed the warnings of future inflation and the potential of new bubbles and leave rates unchanged. Either way the story is expected to a dollar bullish one.

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