Daily Forex Overview

Previous session overview

Growing inflation concerns, spurred on by the elevated price of oil and food, as well as recent speeches by Fed members, have turned the market's attention from growth concerns and potential rate cuts to rate hikes.

U.S. economic data released on Friday showed that the world's biggest economy remains in a tight spot. But commodity prices have remained high worldwide and U.S. long-term interest rates are on an upward trend, helping the dollar to rally.

The euro slumped beneath the 1.55-region to 1.5463 following a disappointing set of German retail sales data, which unexpectedly declined for the second consecutive month down 1.7% m/m and 1.0% y/y. The Euro zone unemployment rate in April held steady at 7.1%, while the flash inflation for May crept up to 3.6% from 3.3% a month earlier.

The British pound weakened briefly to 1.9683 on speculation that a weakening economy may force the Bank of England to cut interest rate later this year, however, cable rebounded strongly due to intra-day dollar's weakness against other European currencies together with the renewed cross buying in sterling especially versus the Japanese yen.

On Friday, USDJPY settled in a very tight sideways trading range close to the recent highs set earlier last week. There was not one single factor (oil, stock markets or the USD eco data) to give trading in this currency pair a clear direction. So, USDJPY closed the session at 105.51; almost unchanged from the 105.49 close on Friday.

The greenback rose against the Canadian dollar from 0.9875 to 0.9981 after a government report showed Canada economy unexpectedly shrank by 0.3% in the first quarter, (expectation was a 0.3% increase), fueling speculation the central bank will cut borrowing costs next month.

Market expectation

GBPUSD is slipping in early European trade and is now almost 1 cent off Asia's 1.9761 high. Next support comes in at 1.9615.

The odds are rising that GBP will now fall after weeks of remaining resilient on the assumption that inflation fears will keep the Bank of England from cutting rates. However, these inflation concerns could recede after a week of data showing tumbling house prices, collapsing consumer confidence, and pay settlements softening.

AUDUSD will likely test key support levels as European traders respond to softer-than-expected Australian retail sales data, with pair possibly touching 0.9450. Pair finding good support at 0.9480 but Europe selling may push pair under there, with next support in low 0.9400.

This week, currency traders will pay close attention to the European Central Bank's interest rate decision Thursday and the release Friday of the U.S. nonfarm payrolls report for May.

Today, the Euro zone calendar contains the final PMI manufacturing surveys for the month of May. Today, the ECB will also celebrate its 10th anniversary in Frankfurt with speeches of ECB's Trichet among others.

Over the weekend, several ECB governing council members sounded concerned about the current high inflation levels. However, as long as the rise in inflation remains mainly limited to higher energy and food prices, we don't expect the ECB to raise interest rates, as it knows it can do little about these prices. In the course of the week, an update on our ECB strategy will be published.

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