US Dollar Corrects Higher, Japanese Producer Prices Fall Most on Record (Euro Open)

The US Dollar capitalized a quiet calendar and muted action on Asian stock exchanges, correcting higher overnight after yesterday’s selloff. Japan’s Corporate Goods Price Index fell by the most on record, hinting at the return of deflation to the world’s second-largest economy. June’s UK PPI is on tap in European hours.

Key Overnight Developments

• Japan’s Corporate Goods Prices Fall Most on Record
• Euro, British Pound Inch Lower in Overnight Trading

Critical Levels

The Euro trended lower in overnight trading, moving down -0.3% against the US Dollar ahead of the opening bell in Europe. The British Pound also saw selling pressure, testing as low as 1.6270, but prices recovered above the 1.63 mark late into the session. A light calendar and a muted session on Asian stock exchanges allowed the greenback to correct a bit higher after yesterday’s selloff.

Asia Session Highlights

Japan’s Domestic Corporate Goods Price Index measuring the trends I the cost of goods purchased by Japanese businesses fell at an annualized rate of -6.6% in June, the most on record, reflecting lower energy costs. Indeed, the price of coal and petroleum fell by a whopping -39.4% from the previous year. The data hints at downward pressure on consumer prices in the months ahead as manufacturers pass on lower production costs via cheaper finished goods. CPI posted the largest drop in 7 years in May, with continued losses amounting to a return of deflation in the world’s second largest economy. This threatens to keep a lid on a meaningful rebound in economic activity for the foreseeable future as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.

Euro Session: What to Expect

June’s UK Producer Price Index report is set to show that output prices fell at an annual rate of -0.8%, the most in over seven years. The metric foreshadows downward pressure on consumer prices as lower wholesale costs are reflected in the final price tag. The Bank of England has acknowledged this, noting in its latest inflation report that “CPI inflation is likely to drop below the 2% target later this year” as lower food and energy prices offset upward price pressure from a cheaper British Pound. Yesterday, the central bank kept rates unchanged at 0.5% and deferred any changes in their 125-billion quantitative easing program until August.

However, the British Chamber of Commerce has urged policymakers to expand their asset-buying scheme by 25 billion pounds, saying a recovery is “not guaranteed”; the call for further easing has been echoed by the Shadow Monetary Policy Committee, a group of independent economists that meet at the Institute of Economic Affairs. The disparity in growth forecasts is also notable: the IMF expects the UK economy will grow 0.2%, a survey of economists conducted by Bloomberg points to a 0.9% result, while the OECD says growth will be flat in 2010. If reality proves to side with the pessimists in the days ahead, slower output growth could well translate into a steeper than expected decline in inflation, calling for the BOE to step up easing efforts.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Corrects Higher, Japanese Producer Prices Fall Most on Record (Euro Open)

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