London Session

Continued weakness in stock markets in Asia overnight has moderated with European indices being largely flat this morning. While the appetite that drove last week's risk trade has largely been replaced by caution, the EUR managed to win back some of its losses vs the USD aided by the balanced tone of the ECB's May monthly bulletin and some optimistic comments from the ECB's Vice-President Papademos. Gains in EUR/USD were short-lived, however, with USD buyers stepping in around EUR/USD1.3600.

In its May monthly bulletin the ECB reported ''balanced risks'' to its inflation forecast.
Papademos stated that ''we have seen an increasing number of positive signs suggesting that the economy is stabilising and that the recovery may start sooner than previously envisaged''. As a consequence the market revisited the idea that 1.0% may prove to be the floor in ECB rates. However, tomorrow's publication of German, French and Italian Q1 GDP data are set to be very weak and thus could reinstate the gloomy economic outlook. A re-emergence of disparate views from ECB board members, this time on whether or not the ECB would extend its plans to buy EUR60 bln of covered bonds, was largely shrugged off by the market.

In tune with the flat tone in stocks, USD/JPY has been pivoting around the 95.50 level, ahead of key support at 95.00. Activity in AUD/USD has been mostly contained within a tight 0.7550 – 0.7500 range. Cable buying continues to protect it from the 1.51 level, however, sentiment with respect to the pound has been undermined by the very dovish tone of yesterday's BoE Inflation Report and upside has struggled to push above the GBP/USD1.5160 level.

This afternoon's US Apr PPI data is set to illustrate a benign inflationary backdrop (median +0.1% m/m for the core figure). The market is expecting initial claims around 610K.

Upcoming Economic Data Releases (US Session). Prior, Expected