FX Island

British Pound (BPM8):

The BP opened higher at 1.9805 against a weaker Dollar, higher oil prices and inflation concerns that should keep rates ‘unchanged’ at the June 4-5 MPC meeting. A less than expected decline in Retail Sales helped prices bounce to 1.9820, before a DX bounce on the better than expected Jobless Claims sent the BP lower. Prices slid to a morning Lo of 1.9748, before bouncing into the afternoon session. As the DX rose, the BP retraced to a daily Lo of 1.9744, before closing the session at 1.9749, up 100 tics. The s/t trend remains ‘positive’ w/ firm momentum indicators. Traders will key off the DX reaction to Existing Home Sales, before leaving for the Holiday weekend. Longs should tighten ’stops’ or buy ‘puts’ to reduce exposure. A higher open should find Resistance at 1.9828 and 1.9908, while an open below 1.9739 may find Support at 1.9659 and 1.9570.

Dollar Index (DXM8):

The DX opened higher at 72.10 and slid to 72.05, before a decline in Jobless Claims sent prices up to our Pivot level of 72.22. Traders will key on energy prices and Friday’s Existing Home Sales ahead of a Holiday weekend. Prices rose to a mid-day Hi of 72.37, before trailing lower into the afternoon session. Prices bounced to a Daily Hi of 72.41, before closing at 72.40, up 32 tics. The s/t trend remains ‘negative’ w/ weak momentum indicators. The close above the 61.8% Fib level may attract technicians, but a negative Existing Home Sales report could weigh on prices. Shorts may take profit-risk off the table ahead of the long Holiday weekend. A higher open should find Resistance at 72.56 and 72.72, while an open below 72.25 may find Support at 72.08 and 71.76.

Canadian Dollar (CDM8):

The CD opened higher at 1.0160, but retraced on a weaker Retail Sales report to a 1.0121 and a bounce in the DX. Prices rebounded to our opening level, before profit-taking in the energ/metals and the rising DX sent prices back to our Pivot level of 1.0134 as we begin afternoon trading. Prices continued to trade on either side of our Pivot level of 1.0134, before closing at 1.0142, down 9 tics. The s/t trend remains ‘positive’ w/ expensive momentum indicators. Direction of oil/metals should dictate s/t direction. Longs need to tighten ’stops’ or buy ‘puts’ to reduce exposure. A lower open may find Support at 1.0118 and 1.0094, while an open above 1.0145 should find Resistance at 1.0169 and 1.0196.

Euro Currency (ECM8):

The EC opened lower at 1.5738 after a weaker than expected New Industrial Orders report and slid to 1.5708 against a stronger BP and firmer DX. Prices bounced to a morning Hi of 1.5743, before retracing to a morning Lo of 1.5680 against the firmer DX. The firmer DX continued to press the EC lower into the close of 1.5681, down 78 tics. The s/t trend remains ‘positive’ w/ expensive momentum indicators. Hawkish tones continue to support the possibility of a rate hike, which could see traders buying the ‘dips’. Longs should still tighten ’stops’ or buy ‘puts’ to reduce exposure ahead of the Holiday weekend. A lower open may find Support at 1.5639 and 1.5596, while an open above 1.5717 should find Resistance at 1.5760 and 1.5838.

Japanese Yen (JYM8):

The JY opened lower at .9701 and retraced to .9647 against a stronger BP and firmer DX. Pressure from a stronger DX sent the JY to a morning Lo of .9617 and traded in a thin range as we begin the afternoon session. Traders took profit/risk off the table towards the close, sending prices to a daily LO of .9589 and closing at .9592, dow 119 tics. The close below the 9-day MA changes the s/t trend to ‘negative’ w/ neutral momentum indicators. Traders will key off the DX and the Home Sales report. A lower open may find Support at .9539 and .9487, while an open above .9642 should find Resistance at .9694 and .9797.

by Scott Owens

FX Engines

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Dollar Index (DXM8):

The DX opened higher at 73.58 and rose to a morning Hi of 73.66 ahead of the CPI report. A lower than expected drop in the ‘core’ rate to +0.1% m/m, and +2.3% y/y suggested that inflation may be easing and rate increases may not have to be implemented as soon as origninally thought. Prices slid to a morning Lo of 73.39 and bounced into the afternoon session and climbing towards the close of 73.565, up 13 tics. The s/t trend remains ‘positive’ w/ firm momentum indicators. Will slowing inflation take the need of a rate increase off the table? Odds of keeping rates ‘unchanged’ at 2.00% at the June 25th FOMC meeting increased to 90%. Higher equity prices in Japan may entice carry-traders to seek higher yields, which could weigh on the DX ahead of a number of economic reports, most notable would be Jobless Claims. A lower open may find Support at 73.30 and 73.04, while an open above 73.65 should find Resistance at 73.91 and 74.25.

Canadian Dollar (CDM8):

The CD opened higher at 1.0022 and rose to a morning Hi of 1.0033, more…

Written by Terri Belkas and David Song, DailyFX.com

The US dollar swayed as investors continued to feed their risk appetite, leading the higher-yielding commodity currencies higher. As a result, the low yielding Yen took the biggest loss against the greenback, with the Swiss franc following behind as the pair rose to trade in the 1.044 range. Against the European currencies, the US dollar continued to lose its footing as mounting inflationary concerns in Europe took hold of investors. As a result, both the Euro and British pound advanced against the US dollar as the pairs rose to 1.553 and 1.957, respectively.

A speech by Chicago Fed President Evans lowered the growth prospects for the US economy as he highlighted the growing weakness in household spending, and stated economic growth to remain sluggish throughout 2008. However, Fed President Evans did go on to say that he expects economic growth to recover by 2009, and expects inflation to fall within 1.5 to 2 percent by 2010. On the economic front, the US Budget Surplus fell to $159.3B from $177.7B as the government continued to dish out more money for military and governmental agendas, with corporate tax receipts falling more than expected as it dipped 15 percent this year. more…

Less than an hour after the European Central Bank announced the benchmark rate would be held at 4.00 percent, President Jean Claude Trichet delivered his usual commentary to an attentive public. Over the past few weeks, speculation that the policy authority would take a more dovish approach to its rate decisions had grown after a number of leading indicators have shown a stunting in the region’s strong pace of economic growth and data that suggests inflation trends are finally pulling back to tolerable levels.

Just yesterday, a report of consumer spending revealed Euro-Zone retail sales plunged 1.6 percent in the year through March – the sharpest decline on records going back to 1995. More importantly, for the inflation-minded policy board, the leading annualized German CPI number unexpectedly dropped from a 3.1 percent to 2.4 percent clip, which was both a 10-month low and much closer to the central bank’s 2.0 percent target.

However, despite these dovish shifts in economic data, President Trichet did not waver in his hawkish stand. Highlighting the group’s primary concern for the future of policy action, the central banker said that upside risks to inflation were prevailing and that price pressures would remain their “highest priority.” Furthermore, Trichet stated that in attempting to avoid second round inflation effects, he was concerned about the short to medium-term effects of rising food and energy prices. What’s more, he suggested he was also worried about the strong pricing power that firms have had and attempts to index wage growth – both factors that easily send inflation into an upward spiral. Looking outside of his inflation concerns, even his gauge of economic growth and the health of the financial markets was hawkish on balance. While the President said their were downside risks to growth, he still read moderate, ongoing growth in data. Altogether, he confirmed his belief the economy would meet the ECB’s forecasts for 2008 growth. One possible caveat to stable growth though was financial market turmoil. At the same time, after mentioning this factor as the main downside risk to the economy going forward, he went on to say that he saw little constraint in lending and tha tmoney and credit growth were “still vigorous.”

Altogether, the ECB’s hawkishness was not unexpected; but the optimistic view for economic growth amid the global downturn and ongoing credit crunch was not fully factored into the market. And, while there were comments that suggested the group would not lift rates in the foreseeable future, they are still far more hawkish than their American, British and Canadian counterparts. With rate forecasts showing little sign of yielding, the fundamental strength of the euro may weather otherwise significant declines in future economic indicators.

Written by: John Kicklighter, Currency Analyst for DailyFX.com

Written by Terri Belkas, Currency Analyst

Following a week of major US economic indicators, the only significant release pertinent for the US Dollar specifically this week will be ISM Services, which could be surprisingly strong. Meanwhile, employment data out of Australia and Canada could shake up the commodity dollars, while rate decisions from the Bank of England and European Central Bank may not be as market-moving as usual.

1. Conditions in US non-manufacturing sector – which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance – are anticipated to remain contractionary in April, as the Institute for Supply Management index is estimated to fall to 49.5 from 49.6. However, there is a chance this figure could be a bit better than forecasted, as employment in the services sector surged during April. Indeed, according to both the ADP employment report and Non-Farm Payrolls, the services sector was one of the only areas to hire additional workers during that period, while goods producing companies are practically bleeding workers. If ISM Non-Manufacturing manages to jump above the 50 mark – signaling expansion – the news will only add to speculation that the Federal Reserve will leave rates unchanged when they meet again in late June.

2. The Australian labor markets have tightened substantially over the past few years, as the unemployment rate dropped to multi-decade lows of 4.0 percent in February. While this rate ticked up to 4.1 percent in March, conditions remain resilient and this has driven wages higher, boosted disposable income, increased domestic demand and economic growth in general, but has also fueled inflation. Indeed, the Australian labor markets are expected to add on another 10,000 workers in April, and like the US Non-Farm Payrolls release, the figure rarely meets expectations and can lead to volatile short-term price action for the Australian dollar immediately following the news at 21:30 EDT.

3. The Bank of England is expected to leave rates steady on Thursday at 5.00 percent after cutting by 25bps during their last meeting. The rate decision will come at 7:00 EDT and since the Monetary Policy Committee is anticipated to leave rates unchanged, they are unlikely to issue a monetary policy statement which should leave the market’s reaction to the news very muted. Nevertheless, given the fact that the vote for the April rate cut included six in favor of the 25bp reduction, two votes for no change, and one vote for a 50bp cut, it’s clear that there is major disagreement amongst the Committee on what their next move should be. Inflation pressures in the UK have not been quite as strong as in the Euro-zone, though CPI is still above MPC’s comfort zone, and in the Bank’s Financial Stability Report they tried to put a positive spin on the credit crunch by saying it was “needed after the credit boom and was bound to have costs.” However, the MPC also noted major risks from a plunge in commercial property values, which could lead to significant losses for UK banks on losses related to commercial mortgage-backed securities (CMBS). This has stoked concerns that the UK is in for a US-style housing market collapse, or worse, an all-out recession. As a result, the risks are tilted very much to the downside for the British pound going forward.

4. Like the Bank of England, the European Central Bank is widely expected to leave rates steady at 4.00 percent for the eleventh consecutive meeting. The rate announcement will come at 7:45 EDT, but the big show is at 8:30 EDT when ECB President Jean-Claude Trichet will give his monthly press conference. Will he remain hawkish, or focus more on the instability in the markets? Estimates for Euro-zone CPI in April plunged to 3.3 percent from 3.6 percent, though this is still well above the ECB’s 2 percent target as energy and food costs remain high. On the other hand, the ECB has stepped in to inject liquidity into the money markets, as credit conditions remain tight. There’s little doubt ‘price stability’ will be the foremost concern for Trichet, but if he suggests that price pressures will moderate in the near-term or that feeble financial market conditions are threatening economic growth, the euro could actually sell-off across the majors.

5. The only significant event risk on Friday will be from the release of the Canadian net employment change at 7:00 EDT. This release is essentially “the other NFP” report, as the data tends to be highly market-moving for the Canadian dollar and rarely meets estimates. Lately, the net employment change has been lackluster, but a surprisingly strong figure will undoubtedly lead the USD/CAD pair to plunge sharply in the minutes after the news hits the wires. On the other hand, a disappointing net employment change could lead the pair to surge. However, follow-through during the rest of the day tends to be limited. Check in to see what other traders think about the USD/CAD pair and the Canadian data post-release in the DailyFX USD/CAD Forum.

Written by Kathy Lien, Chief Strategist of DailyFX.com

This week, economic data has had zero impact on the British pound.

Over the past few days, the currency pair managed to rally on weaker economic data and today it sold off despite a smaller drop in manufacturing PMI.  The move in the sterling is largely due to the overall strength of the US dollar although there were some positive news from the UK government this morning.  According to the bank of England’s Financial Stability Report, the worst of the global financial crisis could be over.  Prime Minster Gordon Brown also promised to cut corporate taxes to prevent UK companies from moving abroad.  At the same the BoE warned that the country’s biggest banks could see major losses as the commercial mortgage market deteriorates.  Nonetheless the UK economy is still in a vulnerable position which makes further gains unlikely.