Forex: British Pound Gives Back, U.S. Dollar To Benefit From Risk Aversion

The rebound in the British Pound was certainly short-lived and the sterling may continue to lose ground throughout the North American trade as currency traders scale back their appetite for risk.

Talking Points

• British Pound: Retail Sales Tops Forecast, BoE Holds Cautious Tone
• Euro: Holds Narrow Range, ECB Opposes Restructuring Greece's Debt
• U.S. Dollar: Existing Home Sales, Philadelphia Fed Index On Tap

The rebound in the British Pound was certainly short-lived and the sterling may continue to lose ground throughout the North American trade as currency traders scale back their appetite for risk. The GBP/USD rallied to 1.6207 as retail spending in the U.K. increased more-than-expected in April, but the shift in trader sentiment is likely to spur increased selling pressures for the pound-dollar as risk trends continue to dictate price action in the currency market. In turn, the exchange rate certainly looks poised to test former resistance around 1.6000 for near-term support, but the sterling could face additional fundamental headwinds in the coming weeks as the Bank of England maintains a cautious outlook for the region.

BoE board member Charles Bean expects household consumption to remain subdued throughout 2011 as Britons cope with high inflation, and warned that the stickiness in price growth could result in higher wage demands while delivering a speech in Northern Ireland. Mr. Bean went onto say that the European sovereign debt crisis could have a spillover effect on the U.K. if it hits the banking sector, and expects price growth to remain elevated throughout the year despite the ongoing weakness within the real economy. The comments suggest that the MPC will ultimately have to toughen its stance against inflation as the central bank forecasts inflation to reach 5% this year, and speculation for a rate hike should help to prop up the British Pound as currency traders weigh the outlook for monetary policy. In turn, we should see the GBP/USD continue to pare the sharp decline from earlier this month, but there pair may struggle to get back above former resistance around 1.6400 as the MPC looks to carry its wait-and-see approach into the second-half of the year.

The Euro held a narrow range during the overnight trade after retracing the overnight decline to 1.4205, but the single-currency may struggle to hold its ground as there appears to be shift in risk sentiment. As the EUR/USD struggles to cross back above the 50-Day SMA at 1.4332, the exchange rate may continue to consolidate ahead of the weekend, but the Euro certainly remains at risk of facing additional headwinds over the near-term as European policy makers remain split on how to address the ongoing turmoil in Greece. European Central Bank board member Nout Wellink strongly opposed restructuring Greece's debt, saying that the aftermath would also hurt banks throughout region, and the heightening risk for contagion reinforces a bearish outlook for the single-currency as the European periphery face record-high financing costs. In turn, the near-term rally in the EUR/USD is likely to be short-lived, and we should see a test of 1.4000 in the coming days unless the ECB talks up speculation for a rate hike in the coming months.

The U.S. dollar certainly appears to be regaining its footing ahead of the North American trade and the rebound in the reserve currency may gather pace throughout the North American trade as risk appetite falters. However, the slew of data due out later today could spark a rise in market sentiment as we are expected to see the recovery in the world's largest economy gather pace. The U.S. existing home sales report for April is anticipated to show 2.0% increase in purchases, while the Philadelphia Fed manufacturing index is projected to increase to 20.0 in May from 18.5 in the previous month. A shift in market sentiment could certainly produce difficult trading conditions during the North American trade, but the uncertainties surrounding the global economy may continue to prop up the reserve currency as it benefits from safe-haven flows.

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Related Articles: Weekly Currency Trading Forecast

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

FX Upcoming

Currency	GMT	EDT	Release	Expected	Prior
USD	13:45	9:45	Bloomberg Economic Expectations (MAY)	--	-16
USD	13:45	9:45	Bloomberg Consumer Comfort (MAY 15)	--	-46.9
USD	14:00	10:00	Existing Home Sales (APR)	5.20M	5.10M
USD	14:00	10:00	Existing Home Sales (MoM) (APR)	2.0%	3.7%
USD	14:00	10:00	Leading Indicators (APR)	0.1%	0.4%
USD	14:00	10:00	Philadelphia Fed. (MAY)	20.1	18.5
CAD	14:30	10:30	Bank of Canada Review Release
CAD	14:45	10:45	BoC Governor Mark Carney Speaks on Bretton Woods
USD	16:00	12:00	Fed's William Dudley Speaks on U.S. Economy
USD	17:30	13:30	Fed's Richard Fisher Speaks on U.S. Economy, Monetary Policy
USD	17:40	13:40	Fed's Charles Evans Speaks on U.S. Economy

Currency	GMT	Release	Expected	Actual	Comments
JPY	23:50	Housing Loans (YoY) (1Q)	--	2.7%	Cools for the third month.
JPY	23:50	Gross Domestic Product (QoQ) (1Q P)	-0.5%	-0.9%	Contracts for two straight quarters. Largest decline since 2009.
JPY	23:50	Gross Domestic Product Annualized (1Q P)	-1.9%	-3.7%
JPY	23:50	Gross Domestic Product Deflator (YoY) (1Q P)	-1.8%	-1.9%
JPY	23:50	Nominal Gross Domestic Product (QoQ) (1Q P)	-0.7%	-1.3%
AUD	1:00	Consumer Inflation Expectation (MAY)	--	3.3%	Weakens for the fourth month.
AUD	1:30	Average Weekly Wages (QoQ) (FEB)	1.2%	1.0%	Slowest pace of growth since August 2010.
AUD	1:30	Average Weekly Wages (YoY) (FEB)	3.8%	3.8%
JPY	4:30	Industrial Production (MoM) (MAR F)	--	-15.5%	Contracts for the first time since October 2010.
JPY	4:30	Industrial Production (YoY) (MAR F)	--	-13.1%
JPY	4:30	Capacity Utilization (MoM) (MAR)	--	-21.5%
JPY	5:30	Nationwide Department Store Sales (YoY) (APR)	--	-1.5%	Weakens for the second month.
JPY	5:30	Tokyo Department Store Sales (YoY) (APR)	--	-5.5%
GBP	8:30	Retail Sales ex Auto Fuel (MoM) (APR)	0.8%	1.2%	Expands for the second month, led by discretionary spending on clothing and footwear.
GBP	8:30	Retail Sales ex Auto Fuel (YoY) (APR)	2.2%	2.7%
GBP	8:30	Retail Sales inc Auto Fuel (MoM)	0.8%	1.1%
GBP	8:30	Retail Sales inc Auto Fuel (YoY)	2.5%	2.8%
CHF	9:00	ZEW Survey (Expectations) (MAY)	--	-11.5	Falls for the first time in four months.
EUR	9:00	Italian Current Account (euros) (MAR)	--	-5507M	Deficit narrows for third month.
GBP	10:00	CBI Trends Total Orders (MAY)	-9	-2	Highest reading since March.
GBP	10:00	CBI Trends Selling Prices (MAY)	--	24
USD	12:30	Initial Jobless Claims (MAY 14)	420K	409K	Lowest reading since the week ending April 15.
USD	12:30	Continuing Claims (MAY 7)	3720K	3711K