Forex Trading

The Euro and the British Pound may face selling pressure in the coming session as the UK unemployment rate rises to the highest in nearly 12 years while Euro Zone inflation shrinks for the first time since the creation of the single currency in 1991. May’s Swiss Retail Sales report is also on tap.

Key Overnight Developments

• Australia’s Leading Economic Index Falls For the First Time Since February
• Bank of Japan Keeps Rates at 0.10% But Cuts GDP Growth Forecast, Extends QE
• Euro, British Pound Rise Against US Dollar on Overnight Stock Gains

Critical Levels



The Euro traded higher in the overnight session, adding 0.2% against the US Dollar. The British Pound followed suit, testing as high as high as 1.6337. The greenback lost ground as stocks followed Wall St higher across Asian exchanges, trimming demand for the safety-linked currency.

Asia Session Highlights



Australia’s Westpac Leading Index shrank for the first in three months in May, slipping -0.2%. The metric is designed to predict The annual rate of decline slowed to -3.9%, the lowest in at least 6 months. Westpac chief economist Bill Evans struck a cautiously optimistic tone following the release, saying “This reading supports the reasonable expectation that we have passed the worst, although the index is still contracting on a six-month annualized basis.” Evans has previously revealed that Westpac expects the economy will shrink 0.6% in the second quarter and contract at an annualized rate of -1.5% through the second half of this year.

Australia has shown tentative signs of stabilization as the government distributed over A$12 billion in cash handouts and committed to A$22 billion for infrastructure projects. The big question going forward is if current momentum can be maintained as the flow of stimulus cash dries up. On balance, the outlook seems far from rosy: the labor market continues to suffer, erecting barriers to a meaningful rebound in domestic demand, while the latest trade data reveals lackluster overseas demand for coal and iron ore, Australia’s top export commodities. Although the Reserve Bank of Australia kept interest rates unchanged at 3% earlier this month, Governor Glenn Stevens noted that there is still “scope for further easing of monetary policy”, identifying credit conditions and the effects of economic weakness on asset quality as “a challenge”.

The Bank of Japan kept interest rates unchanged at 0.10%, as economists expected. Policymakers said that “economic conditions have stopped worsening” and restated expectations that the economy will begin to recover by the second half of the 2009 fiscal year (the six months starting in October). Maasaki Shirakawa and company did qualify their optimism however, saying “uncertainty over the economic outlook is high” and revising their growth projections downward to reflect a -3.4% GDP contraction (versus the previously reported -3.1%) in the 12 months to April 2010. The BOJ also extended standing credit easing measures, saying they will keep current loan collateral practices in place through March of next year versus December and pay interest on bank’s reserves through January 2010 (as opposed to October 2009 as originally planned).

Euro Session: What to Expect



UK Jobless Claims are expected to rise by 41,200 in June, pushing the Claimant Count (a measure of the unemployment rate) to 5.0%, the highest since September 1997. Continued weakness in the labor market suggests that, improving leading indicators notwithstanding, a robust recovery in Europe’s third-largest economy will have a hard time gaining traction as job losses weigh on consumption, the largest contributing factor to GDP growth. The current state of affairs was nicely summarized by London-based think tank NIESR, which recently said “the U.K. economy is now stagnating rather than continuing to contract at a sharp pace”. NIESR expects the economy to shed -0.4% in the second quarter, a dubious improvement after GDP lost -4.9% through the first three months of the year, the most at least since 1956. A survey of economists conducted by Bloomberg expects the jobless rate to average 8.4% through the end of next year.

Turning to the continent, the Euro Zone Consumer Price Index report is set to confirm preliminary estimates and show that inflation fell at an annual pace -0.1% in June, the first negative reading on record since the creation of the single currency in 1991. Entrenching expectations of lower prices threatens to commit the currency bloc to a long-term period of stagnation as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment. The market is pricing in virtually no chance that the European Central Bank will cut benchmark rates at least this year while the International Monetary Fund forecasts that the Euro Zone will stand apart from other industrialized economies in seeing GDP shrink in 2010, making the deflationary threat all the more credible. Although Trichet and company have offered an unprecedented 442 billion euro in 12-month bank loans as a means of de-facto monetary easing and will also move forward with a 60 billion bond-buying scheme, these measures may prove inadequate as there is no guarantee that banks will lend out the funds raised from action. Indeed, banks may chose to hang on to the cash as a buffer against $1.1 trillion in as yet unrealized losses linked to the subprime mess, per the IMF, as well as the fallout from looming defaults and/or devaluations among the EU’s recently-minted central European members.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro and British Pound Vulnerable on Weak UK Jobs, Euro Zone Inflation Data (Euro Open)