FOREX: Dollar to Retreat as Risk Appetite Recovers, Pound Drops on Bank Downgrade Fears

The Dollar is likely to pull back as risk appetite mounts a corrective recovery. The Pound dropped overnight as Moody's threatened to cut UK banks' credit rating.

Overnight Headlines

• British Pound Drops as Moody's Threatens to Cut UK Banks' Credit Ratings
• NZ Dollar Outperforms as Inflation Expectations Rise, Stoking Rate Hike Bets

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3988	1.4106
GBPUSD	1.6043	1.6194

The Euro edged higher in overnight trade, adding as much as 0.3 percent against the US Dollar as the single currency retraced some of the selloff in New York trade. The British Pound declined after Moody's threatened to cut the credit ratings of 14 UK lenders (see below). Our long USDJPY has hit its first target and we are looking for opportunities to buy the Dollar against other top currencies.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
3:00	NZD	RBNZ 2-Year Inflation Expectation (2Q)	3.0%	-	2.6%

The New Zealand Dollar outperformed in overnight trade, rising as much 0.7 percent against its top counterparts, after the central bank's second-quarter Inflation Expectations survey showed respondents were expecting price growth to accelerate. Forecasts for GDP growth, hourly wages, and unemployment rate also improved. The report stoked RBNZ tightening expectations, with a Credit Suisse gauge tracking investors' priced-in rate hike outlook for the year ahead rising for the first time in two weeks and yielding the largest daily increase in a month.

Meanwhile, the British Pound found itself on the defensive, down as much as 0.3 percent against the majors after Moody's Investor Service put 14 major UK banks under review for a credit rating cut. Sky News suggested that Moody's will take about three months to review how much of the UK lenders' current credit profile owes to government support after they accepted close to £1 trillion in bailouts during the 2008 financial crisis. Accounting for the external support may bring the ratings of major banks including Lloyds and RBS lower by two to five levels, Sky reported.

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
6:00	EUR	German GDP s.a. (QoQ) (1Q F)	1.5%	1.5%	Medium
6:00	EUR	German GDP w.d.a. (YoY) (1Q F)	4.9%	4.9%	Medium
6:00	EUR	German GDP n.s.a. (YoY) (1Q F)	5.2%	5.2%	Medium
6:00	EUR	German Capital Investment (1Q)	3.3%	-1.1%	Low
6:00	EUR	German Private Consumption (1Q)	0.5%	0.2%	Low
6:00	EUR	German Construction Investment (1Q)	7.1%	-3.9%	Low
6:00	EUR	German Domestic Demand (1Q)	1.3%	-0.4%	Low
6:00	EUR	German Government Spending (1Q)	0.2%	0.6%	Low
6:00	EUR	German Exports (1Q)	2.0%	2.5%	Low
6:00	EUR	German Imports (1Q)	1.7%	0.9%	Low
6:45	EUR	French Own-Company Prod Outlook (MAY)	19	19	Low
6:45	EUR	French Production Outlook Indicator (MAY)	-	20	Low
6:45	EUR	French Business Confidence Indicator (MAY)	109	110	Low
8:00	EUR	German IFO - Expectations (MAY)	107.0	107.7	Medium
8:00	EUR	German IFO - Business Climate (MAY)	113.7	114.2	Medium
8:00	EUR	German IFO - Current Assessment (MAY)	120.7	121.0	Medium
8:30	GBP	Public Finances (PSNCR) (£) (APR)	2.5B	24.8B	Low
8:30	GBP	Public Sector Net Borrowing (£)(APR)	4.4B	16.4B	Low
8:30	GBP	PSNB ex Interventions (£)(APR)	6.5B	18.6B	Low
9:00	EUR	Euro-Zone Indus New Orders s.a. (MoM) (MAR)	-1.1%	0.5%	Low
9:00	EUR	Euro-Zone Indus New Orders (YoY) (MAR)	12.9%	21.5%	Low
10:00	GBP	CBI Reported Sales (MAY) (APR)	11	21	Low

Germany's IFO Survey of business confidence headlines the economic calendar, with the closely-watched Expectations index set to show sentiment soured for the third consecutive month in May to hit the lowest level in over a year. The outcome follows a roundly disappointing set of PMI figures, compounding selling pressure already facing the Euro as sovereign debt fears return to the spotlight.

ECB rate hike expectations are already on the decline, with a Credit Suisse gauge tracking investors' priced-in tightening outlook for the year ahead down 18 percent (17.7bps) over the past three days. Further signs of economic weakness will make it easy for Jean-Claude Trichet and company to hold off on further policy normalization, opening the door for the markets to continue punishing the single currency.

Still, risk sentiment trends remain the dominant driver of major currency pairs. With that in mind, a corrective bounce across the spectrum of the US Dollar's top counterparts appears likely at the expense of the safe-haven greenback, with stock index futures pointing higher ahead of the opening bell in Europe.

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com