FOREX: All Eyes on US Inflation Gauge as Currencies Track Risk Sentiment

Traders have turned their attention to the US CPI figures, with an uptick in inflation threatening to boost tightening fears and undermine a rebound in risky assets.

Overnight Headlines

• Euro Consolidates Ahead of German, EZ Q1 GDP Reports
• Pound Sold as NIESR Forecasts UK Growth Slowdown
• NZ Dollar Underperforms After Dovish Bollard Comments

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.4242	1.4398
GBPUSD	1.6226	1.6349

The Euro was little changed in overnight trade; prices briefly dipped below 1.42 to the US Dollar mid-session but quickly recovered ahead of German and Euro Zone GDP figures due to cross the wires ahead of the opening bell in Europe (see below). The British Pound edged lower, down 0.5 percent against the greenback, after London-based think tank NIESR predicted economic growth slowed to a quarterly pace of 0.3 percent in April, marking the first slowdown in four months and weighing on Bank of England rate hike expectations.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
2:00	CNY	Conference Board Leading Index (MAR)	157.0	-	155.4
3:00	NZD	Non Resident Bond Holdings (APR)	62.7%	-	62.8%

The New Zealand Dollar underperformed in overnight trade, down as much as 0.5 percent on average against its major counterparts after RBNZ Governor Alan Bollard wrote in an article for The Press newspaper that benchmark interest rates will remain at 2.5 percent until downside risks to economic growth subside and the island nation begins to recover, singling out the Canterbury earthquakes as a key headwind. The comments pushed a Credit Suisse gauge tracking investors' priced-in rate hike outlook for the coming 12 months to the lowest in over three weeks, taking the Kiwi Dollar along for the ride.

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
5:30	EUR	French Gross Domestic Product (YoY) (1Q)	1.8%	1.5%	Low
5:30	EUR	French Gross Domestic Product (QoQ) (1Q)	0.6%	0.4%	Low
6:00	EUR	German Gross Domestic Product n.s.a. (YoY) (1Q)	4.5%	4.0%	Medium
6:00	EUR	German Gross Domestic Product s.a. (QoQ) (1Q)	0.9%	0.4%	High
6:00	EUR	German Gross Domestic Product w.d.a. (YoY) (1Q)	4.2%	4.0%	Medium
6:45	EUR	French Non-Farm Payrolls (QoQ) (1Q)	0.3%	0.2%	Low
6:45	EUR	French Wages (QoQ)(1Q)	0.6%	0.3%	Low
7:15	CHF	Producer & Import Prices (MoM) (APR)	-	0.4%	Medium
7:15	CHF	Producer & Import Prices (YoY) (APR)	0.5%	0.4%	Medium
8:00	EUR	Italian GDP s.a. and w.d.a. (QoQ) (1Q)	0.3%	0.1%	Low
8:00	EUR	Italian GDP s.a. and w.d.a. (YoY) (1Q)	1.3%	1.5%	Low
9:00	EUR	Euro-Zone GDP s.a. (QoQ) (1Q)	0.6%	0.3%	High
9:00	EUR	Euro-Zone GDP s.a. (YoY) (1Q)	2.2%	2.0%	High

A pickup in Euro Zone economic growth promises to give risk sentiment a bit of a boost in the forthcoming session, with German Gross Domestic Product expected to rise by 0.9 percent while region-wide output adds 0.6 percent in the first three months of the year, marking the strongest performance in three quarters. With markets focused on the growth implications of de-facto and overt tightening in the US and China – the former with the expiry of QE in June and the latter after another strong CPI reading released earlier this week – improving performance in the world's largest collective market promises to offer a bit of hope to beleaguered risky assets.

Stock index futures tracking the S&P 500 – the go-to benchmark for overall risk appetite – are inching deeper into positive territory ahead of the opening bell in Europe, reinforcing the likelihood that sentiment-sensitive currencies will rebound through the end of the trading week after spending much of the past four days on the defensive against the safety-linked US Dollar. The depth of the move will largely depend on US economic data due to cross the wires in the latter half of the session.

Most importantly, Consumer Price Index figures are expected to put the annual inflation rate at 3.1 percent – the highest in 30 months – while the core reading that strips out volatile items like food and energy hits the strongest level since February 2010. Meanwhile, May's preliminary University of Michigan Consumer Confidence gauge is forecast to advance for a second consecutive month. Taken together, the data docket could swiftly bring fears of rising US borrowing costs back into the forefront, undermining the risky asset complex and allowing the greenback to finish the week on a high note.

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