Risk aversion swayed the currency market during the overnight session, with the euro breaking below the 20-Day SMA (1.2208) to reach a low of 1.2177, and the drop in sentiment is likely to drag the single-currency lower going into the U.S. trade as equity futures foreshadow a lower open for the North American market.
Talking Points
• Japanese Yen: Rallies Across the Board
• Pound: U.K. Mortgage Approvals Hold Steady in May
• Euro: Economic Confidence Unexpectedly Improves
• U.S. Dollar: Consumer Confidence on Tap
Meanwhile, European Central Bank board member Ewald Nowotny maintained a dovish outlook for price growth and sees limited risk for inflation in Austria, and pledged to reduce foreign currency lending in Eastern Europe at a briefing in Vienna.
In addition, Mr. Nowotny argued that the tax plan for Hungarian banks are “way out of proportion” as it accounts for a “very high” proportion of GDP, and went onto say that the Governing Council will maintain its exit strategy as the central bank takes the appropriate steps to avert a credit crunch. However, as the governments operating under the single-currency struggle to manage their public finances and plan to tighten fiscal policy, the strains within the real economy could lead the ECB to support the economy over the coming months as it aims to balance the risks for the region. As a result, market participants may continue to sell the euro as the debt crisis weighs on the outlook for future growth, and the exchange rate may fall back below 1.2000 over the near-term as it breaks out of its narrow range from earlier this month. Nevertheless, economic confidence in the Euro-Zone unexpectedly increased in June, with the index rising to 98.7 from 98.4 in the previous month, while the gauge for business sentiment held steady at 0.37 following an upward revision in the April reading.
The British Pound halted the two-day rally and slipped to a low of 1.5012 during the European trade as investors scaled back their appetite for risk, but we may see the GBP/USD maintain the near-term rally from the may lows as policy makers in the U.K. turn increasingly hawkish. However, a report by the Bank of England showed mortgage approvals increased 49.8K for the second consecutive month in May amid forecasts for a 51.0K rise, while consumer credit increased GBP 0.3B during the same period to top expectations to a GBP 0.1B expansion, and the mixed batch of data could lead the central bank to maintain a neutral policy stance over the coming month as it aims to encourage a sustainable recovery. Nevertheless, mounting price pressures have certainly become a growing concern for the MPC, and BoE board member Andrew Sentance may continue to go against the majority as the stickiness in prices raises the risks for inflation.
The U.S. dollar gained ground against most of its major counterparts following the rise in safe-haven flows, while the Japanese Yen rallied across the board, which pushed the USD/JPY to a low of 88.52. As investors scale back their appetite for risk, the drop in market sentiment is likely to carry into the North American trade, and a drop in U.S. consumer confidence could fuel risk aversion throughout the day as investors weigh the prospects for a sustainable recovery in the world’s largest economy. The Conference Board’s gauge for household sentiment is expected to fall to 62.5 in June from 63.3 in the previous month as the nation struggles to emerge from the worst recession since the Great Depression, and the ongoing weakness within the private sector may lead the Fed to support the economy throughout the second-half of the year as Chairman Bernanke maintains a dovish outlook for future policy.
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