Net foreign capital flows into the US fell 34% to a 25-month low of $46.7 bln in April from a revised $70.4 bln in March (initial was $69.8 bln). The $46.7 bln in net capital flows fell short of the $63.4 billion trade deficit for the same month.

Our rationale for expecting $55 bln figure (see morning note)—lower than the consensus forecast of $60 bln-- was the damage suffered by the dollar in the month of April. April's dollar decline was the biggest monthly decline since December –as measured by Fed's Broad Dollar Index. Historically, the weakest months for the TICS data have been those of significant dollar declines as foreign investors grow averse to US assets due to the currency factor.

Considering the dollar’s 2.6% decline in May (trade weighted terms) and the S&P; 500’s 3.1% drop in the same month, the May TICS report (due in July) should show further declines in net foreign capital flows, which will indicate a widening shortfall of trade deficit financing.

July will likely prove to be an especially dismal month for the dollar as not only there is no scheduled FOMC meeting (de facto rate pause), but also will reveal the advanced Q2 GDP report, likely to show growth slowing sharply to 2.7%-2.9% from 5.3% in Q1. With such a notable growth slowdown, it would be unfathomable for the Fed to raise rates 2 weeks later on August 8. Those evolving dynamics in monetary policy expectations should bring about a conclusion to the Fed’s tightening campaign.

POSITIVES

• The sole positive component of the TICS report was the sharp jump in net official (central bank) purchases of US Treasuries to $10.7 bln, after being net sellers at $6.3 bln in March. The increase proved barley sufficient to produce an 8% increase in total net purchases of US treasuries at $3.3 bln after private accounts were net sellers at $7.8 bln.

NEGATIVES

• Net foreign purchases of US stocks tumbled 66% to $6.5 bln, the lowest since November 2005. Considering the sharp equity sell-offs in May, foreign flows into US equity could be in the red for that month, casting an ominous vacuum in the financing of the trade deficit.

• Net purchases of US Treasuries by private accounts (usually hedge funds) plunged 180% to a net selling of $7.8 bln. This was the biggest net selling by private entities of US treasuries since October 2003.

• Net foreign purchases of US corporate bonds fell 66% to $31 bln, while net buys of government Agencies fell 18% to $15.3 bln.



• US residents eased their net purchases of foreign stocks by 18% to $9.8, likely a result of the global sell-off
in equities, which is likely to have been exacerbated in May.

• Japanese holdings of US Treasuries edged up 0.3% to $639 bln, but remained well off their highs of $698 bln in 2004. to $9.8, likely a result of the global sell-off. With 31% of total foreign treasury holdings, Japan is the biggest holder of US Treasuries. Well aware of the currency repercussions of maintaining a massive USD exposure at a time when the Bank of Japan is expected to tighten moneteray policy, Tokyo continues in its quiet campaign of gradually lightening its USD holdings.



The dollar is ending the session modestly lower except against the yen, where the pair is little at 115.00. The unexpected jump in the NY Fed survey to 29.0 from May’s 12.9 surprised expectations of a 10.9 figure and boosted the dollar.

The 295K reading in weekly jobless claims also boosted the dollar, defying expectations of a rise from 302K to 320K. But the upward revision in the previous reading to 315K from 302K helpd neutralize overall decline.

The 0.1% drop in industrial production was the first decline in 4 months but it did not accelerate the post-TICS dollar slide.

The smaller than expected decline in the June Philly Fed to 13.1 from 14.4, accompanied by a rise in the new orders and the employment indices helped allay fears of a broadening slowdown in the regional surveys.

For now, the dollar can continue obtaining its support from an assured tightening in June and the episodic rise in expectations for an August rate hike, which we do not see materializing at this point. With the euro finding a vital base at the expense of the weak TICS report and the yen remaining the weakest link courtesy of the Bank of Japan’s stalling. We expect to EURUSD testing the 1.25 support, and pressured below 1.2750. The status quo shall be sustained as long as the ECB refrains from hinting a July or August rate hike and the Fed sticks to its data dependence rhetoric.

The Japanese yen is being mainly pressured by the Bank of Japan’s slowing road to higher rates. But with the 100 day MA slipping below the 200 day MA for the first time in exactly one year suggests that a top is around the corner. Indeed, we may take out the 115.42 high, but selling pressure is expected to be fierce at 115.75-80.

4:30 UK May Retail Sales (exp 0.5%, prev 0.6%) 5:00 am E-12 May CPI y/y (exp 2.5%, prev 2.4%) 8:30 am US June Empire Manufacturing Survey (exp 10.9, prev 12.4) 8:30 am US Weekly Jobless Claims (exp 320K, prev 302K) 9:00 am US Apr Net Int'l Capital Flows – TICS (exp $55.0 bln, prev $69.7 bln) 9:15 am US May Capacity Utilization (exp 81.9, prev 81.9) 9:15 am US May Industrial Production (exp 0.2%, prev 0.8%) 12:00 pm June Philadelphia Fed Survey (exp 11.0, prev 14.0) 2:00 pm US Fed Chairman Bernanke Speaks.

Boosted predominantly by an overdose of inflationary data and the Fed’s justifiably hawkish rhetoric, the US dollar may be tested by the law of diminishing returns as it encounters an array of potentially weak US data. The economic releases will deflect traders’ attention from the inflation story to the slowdown story. The data will cover a broad array of releases, ranging from the job market (weekly jobless claims), manufacturing (industrial production, Empire survey and Philly Fed survey) and the trade imbalance (TICS data on foreign capital flows).

The April TICS should take center stage along with industrial production and the Philly Fed survey, but the Empire survey—released by the NY Fed—has proven to move the dollar in the past. After tumbling to an 11-month low of 12.4 in May, the June Empire survey is expected to continue falling, reaching 12.4, which should weaken the dollar’s foundation ahead of the TICS (9am NYT) and industrial production (9:15 am).

The reason we expect the April TICS to dip to $55 bln from March’s $69.7 bln is the damage suffered by the dollar in the month of April. In fact, April’s dollar decline was the biggest monthly decline since December –as measured by Fed’s Broad Dollar Index. Historically, the weakest months for the TICS data have been those of significant dollar declines as foreign investors grow averse to US assets due to the currency factor. The most significant and recent cases were; Dec 2004, March 2005, May 2005 and December 2005. Considering the April $62 bln trade deficit, a TICS report at or below $60 bln should help knock off the dollar.

The April TICS may have avoided a disastrous showing due to the mid-month rebound in US stocks—S&P; index. But the May TICS report—due in July (same month when advanced Q2 GDP release should show a significant slowdown and no FOMC meeting) promises to offer a gloomy figure due to the dollar slide and the 3% drop in the S&P; in May.



The June Philly Fed survey is expected to have dropped to a 5-month low of 11.0 from May’s 14.4, but the more dangerous devil lies in the detail. The new orders and employment component fell to 8-month and 24-month lows respectively in the May report (see chart above). Further deterioration should weigh significantly on the dollar.

NOTE:
Kickoff time of the England-Trinidad/Tobago WC soccer match is due to coincide with the release of the Philly Fed survey, therefore may ease liquidity and potentially intensify volatility in market moves.

USDJPY seen dragged to 114 on weak US data

The Bank of Japan expectedly voted unanimously to maintain its zero-interest-rate policy, and will reduce the outstanding balance of current account deposits held by banks to just under 10 trln yen by end of the week. Markets showed no reaction to BoJ Governor Fukui ‘s remarks that he will unload is investment in the scandal-ridden Murakami fund, but should scrutinize his assessment for the economy for any clues on when the Bank will raise rates. Considering the ongoing stock market malaise and the fact that the FOMC will not meet in July, we see very little chance for a July rate hike by the BoJ. Thus, we see a 40% chance of a rate hike in August and a 60% chance in September.

One day after strong Chinese money supply data drove up Asian FX on speculation that China will allow faster appreciation in the yuan vs the dollar, the People’s Bank of China said it will step up the issuance of bonds to the more aggressive lenders as a way to rein in bank lending. These market based measures following recent current account liberalization reform of the last 2 months comprise the building blocks to further yuan appreciation. We see a 60% probability of an actual 1.5%-2.0% revaluation in July. Alternatively, the central bank could resort to doubling its 0.3% permitted daily fluctuation band against the US dollar.

A TICS report below $60 bln should weigh on the dollar, and depending on the extent of the slowdown in industrial production, USDJPY risks being dragged to 114.40, with further weakness seen stabilizing at 113.90. A stronger data showing, or (and) the usual hawkishness from Fed Chairman Bernanke at 2:00 pm NYT could keep the dollar supported above 115.00, but unlikely to revisit its 115.42 high. The fact that 100 day MA is crossing below the 200 day MA should help drag the pair towards the low 114.00s.

Euro to target $1.27

We expect the combination of a weak US TICS (at or less than $60 bln) and general softening in rest of day’s US reports to help the euro regain Wednesday’s 1.2650 high towards the 1.2690s. The 2.5% expected May inflation from the Eurozone should match the advanced/flash release and may offer the euro a slight boost despite claims by the ECB that it will continue its gradual tightening pattern. But the extent of the euro’s advance above 1.2690s will be determined by the components of the Philly Fed survey.

Although Fed Chairman Bernanke’s 2:00 pm speech will cover energy, we caution against the possibility of dollar-positive statements emerging from any reiteration of the upside inflation risks.

The dollar ended the session lower, relinquishing some of its recent gains against the majors in Wednesday trading. Stronger than expected core consumer inflation data initially propped the up the greenback, but sentiment that China would permit the yuan to appreciate more rapidly ahead of this weekend’s G8 FinMin meeting sent the dollar to session lows. The yuan breached past the 8-mark versus the dollar to trade at 7.9996.

Core inflation in May exceeded forecasts prompting markets to fully price in a June Fed rate hike. Moreover, some anticipate further hikes may be necessary to curb inflationary pressures in the economy. May core CPI rose to 0.3%, beating forecasts of a slip to 0.2% and matching April’s figure. On an annual basis, May core CPI posted its highest y/y increase since Feb 2005 at 2.4%. The headline report was in line with expectations at 0.4% and down from 0.6% in the previous month.



The Fed Beige Book saw continued expansion in the US economy in mid April to early June, but expects signs of slowing. Inflationary pressures were prevalent in manufacturing due to higher energy costs, with businesses expressing concerns over high and rising costs. The Fed Book said that consumer spending continued to increase, but growth rate slowed in some districts.

Dallas Fed President Fisher said there was no need for an ultra-dramatic move by the Fed, stressing that it was not behind the curve. He said the Fed would do its utmost to prevent inflation from getting out of hand. While US economic growth has tapered down, Fisher feels it is still positive, adding that past policy moves have had an effect and will continue to do so. He acknowledged the Fed has hiked too far in the previous tightening cycles, but said the FOMC will do its best not to overshoot. Fisher said that inflation has remained at reasonable levels in recent years and the Fed aims to maintain that. Meanwhile, Fed Board Governor Bies said she was uncomfortable with core CPI running near the high 2% range and would prefer for it to be lower. She added that the Fed would prefer to see the economy slow to sustainable pace, but not “drop out of bed”. Bies expects labor force growth to slow and sees sustainable GDP growth around 3.5% or lower.

Euro Recovers Above 1.26

The euro reached a session high near 1.2650 against the dollar and continues to hover above the 1.26-figure heading into early Thursday trading. Traders will turn their attention to Eurozone May CPI due out at 5:00 AM EST on Thursday. Economists expect the year-on-year inflation report to creep up slightly to 2.5%, versus 2.4% in the previous reading.

EURUSD faces interim resistance at 1.2650, followed by 1.2680 and 1.27. Subsequent ceilings will emerge at 1.2740, followed by 1.2775 and 1.28. Support begins at 1.26, backed by 1.2550 and 1.2520. Additional floors will emerge at 1.25, followed by 1.2460 and 1.24.

USDJPY

The Bank of Japan’s slow path towards monetary policy is taking a new twist amid BoJ Governor Fukui’s investment in the scandal ridden Murakami fund. Although Fukui bought in into the fund while he was in the private sector, questions remain regarding the ethical ramifications of Fukui’s decision to hold on to the investment after taking the helm at the central bank. Thus, it is possible that those politicians who favor a continuation of the zero rate policy may be emboldened and pressure Fukui into maintaining ultra low interest rates. Although PM Koizumi and most Cabinet members. Whether BoJ policy board members will support Fukui via a show of support in pursuing the Bank’s gradual path towards normalizing monetary policy or will be divided into opposition remains to be seen. The 19% selloff in the Nikkei from its year high has become a concrete obstacle to the hawks at the Bank. The Murakami affair may erect fresh barriers.

Dollar/yen hovers just beneath the 115-handle. Support starts at 114.60 and 114.20. Further support will emerge at 114, backed by 113.75 and 113.30. Resistance is eyed at 115.50, followed by 115.80 and 116. Additional gains will face subsequent ceilings at 116.40, backed by 116.70 and 117.

8:30 am US May CPI (exp 0.4%, prev 0.6%) May Core CPI (exp 0.2%, prev 0.3%) 11:30 am Fed Board Gov Bies Speaks. 1:00 pm Dallas Fed Pres Fisher Speaks. 2:00 pm Fed's Beige Book.

All eyes shift to this morning’s May CPI report from the US, which is largely deemed as a key determinant of the Federal Reserve’s thinking on inflation. FX, bond and equity markets will scrutinize the core CPI (ex-food and energy prices) after both the March and April figures came in at 0.3%. A figure of 0.3% or more should extend the dollar to fresh multi week highs (see below for detail), while a figure of 0.2% should temper the dollar’s overall gains and may even lead to a modest profit taking.

It is important to state that even a core CPI of 0.0-0.1% would not deter the Fed from making its much anticipated quarter point hike later this months. Such a low figure, however, would drive the market to place more emphasis on the slowdown story, likely to be conveyed in this week’s data releases: May industrial production (seen at 0.2% from 0.8%), June Empire Manufacturing (seen at 10.9 from 12.4), June Philly Fed Index (seen at 11.0 from 14.0) and the June Univ of Michigan consumer sentiment survey (seen at 77.0 from 79.1).

Dollar rally is no sign of US strength

Another point worth making is that the latest dollar rally (of last 3 sessions) has been the manifestation of mainly exogenous factors (those occurring outside the US) rather than a reflection of strengthening fundamentals in the US economy. These include:

1. Emerging market sell-off driving global to safe haven such as US treasuries. The Icelandic Krone’s decline to 6 week lows, the 24% slide from its year highs and yesterday’s resignation of the PM are all signs of the beginning of an EM contagion triggered by an “unlikely” market. With the Brazilian real and Mexican peso down 5% and 10% from their highs of the year, the EM sell-off is not confined to a single market.

2. Stalling progress in the Bank of Japan’s road to tightening.

3. Increased signs that the ECB will stick to its gradualist tightening pattern of quarter basis point per calendar quarter rather than more frequent rate hikes.

4. Increased chances of negotiation between the US and Iran over Tehran’s nuclear technology weighing on gold, oil and safe haven alternatives to the dollar such as the Swiss franc;

5. Emerging expectations that gold will extend its decline towards the 200-day MA of 541.94 per ounce from its current $557.65 per ounce.

The only endogenous factor responsible for the dollar’s upturn is increased inflation expectations, which is sufficiently paramount that it cannot be ignored. But these inflationary pressures are essentially the result of energy pressures rather than a product of continued escalation in economic growth. We expect the dollar’s optimism to start to fade as we approach the June 29 decision FOMC decision. Since the Fed is not scheduled to meet in July, such de facto rate pause will give Fed officials time to “watch” the data, which so far do not look to be heading towards an improvement.

Yen pressured by road not taken

The Bank of Japan’s slow path towards monetary policy is taking a new twist amid BoJ Governor Fukui’s investment in the scandal ridden Murakami fund. Although Fukui bought in into the fund while he was in the private sector, questions remain regarding the ethical ramifications of Fukui’s decision to hold on to the investment after taking the helm at the central bank. Thus, it is possible that those politicians who favor a continuation of the zero rate policy may be emboldened and pressure Fukui into maintaining ultra low interest rates. Although PM Koizumi and most Cabinet members. Whether BoJ policy board members will support Fukui via a show of support in pursuing the Bank’s gradual path towards normalizing monetary policy or will be divided into opposition remains to be seen. The 19% selloff in the Nikkei from its year high has become a concrete obstacle to the hawks at the Bank. The Murakami affair may erect fresh barriers.

A US May core CPI of more than 0.2% should help the dollar regain fresh ground vs the yen, and reaffirm the 115.00-115.50 range as the new post hawkish Fed zone. But pressure is increasingly emerging at the 115.50 target, which is the crossing point of the 200 and 100 day moving averages and the 38% retracement of the 119.42-108.97 move. A figure of 0.2% in the core CPI could drag the pair towards the 114.70s, with key support at 114.18—the 50% retracement of the 119.42-108.97 decline.



Euro requires US core CPI below 0.3%

The aforementioned factors boosting the dollar combined with Tuesday’s bigger than expected decline in Germany’s May ZEW economic sentiment survey helped support expectations that the ECB will not raise rates before September.

The chart shows the euro’s downside may be subject to testing 1.2520 and 1.2410; the major support levels—38% and 50% retracements of the 1.1824-1.1972 move. But expect aggressive buying potential resulting from a core of 0.2% or less, with upside seen testing 1.2720.



World Cup Soccer Review:
Brazil-Croatia 1-0

There were two things highly unusual about Tuesday’s Brazil game: 1) the Brazilian keeper was a team saver; and 2) the Brazilian supporters were eclipsed by the Croatian crowd. Granted, the predominantly “red colored” stands were reflected the large Croat population in Germany and all over Europe. But gone are the days where the camera fixated on beautiful/happy/enthusiastic/painted/lightly dressed Brazilian supporters.

On to soccer, 24 yr old Kaka rose to the occasion as if he owned the game, with his relaxed finesse that is artful and effective. Ronaldinho was solid-except for some disappointing free kicks and Roberto Carlos looked like he was 28 again, taking advantage of the faster than normal soccer balls of this tournament. Adriano was not up to par, and Ronaldo had one chance in which he nearly scored. The reason he did not have any action is simply because he was not given the ball and NOT because there was something wrong with him (though he’s recovering from injury) as the ex female soccer player on ESPN erroneously stated that there must be something “wrong with him” and Brazil became better after Robinho substituted him.

Having said all that, now I know why I don’t automatically answer “Brazil” when people ask me who will win the WC. They have too many gaps in defense and they should thank their goalie Dida and some selfishness of the part of Croatian attack for not scoring. All credit to Croatia’s aggressive and talented side. I wonder what the score would have been had their fearless playmaker Kovac did not leave the game because of an injured rib/back. The fact that Croatia appeared to have more possession of the ball without Kovac doesn’t bode well for Brazil.

France-Switzerland 0-0

Switzerland had luck against them and the sun with them, as they were stopped by the former and had the latter in the eyes of the French defense/Barthez. Switzerland played to win, hence their extremely aggressive (sometimes illegally rough) style but were outclassed by the man of the match Makelele and Zidane despite the latent Vieira.

Zidane proved why he was the world’s best player for most of 1997 and 2002 but seemed excessively generous. 3 or 4 of his passes nearly led to scoring opportunities but he just did not take enough shots. As a matter of fact he took only one shot which was 5 yards wide (maybe he should see Ghana’s Essien yesterday to remember that the leader must start shooting). All in all the Old Maestro showed what he’s worth; knowing when to shield the ball like a wall, when to penetrate the Swiss back with tack whether with 40 yards passes or 10 yards flicks, and when to dribble and feint.

Henry was unlucky a few times headers and the shot that hit the hand of the defender must have led to an indirect free kick inside the box but yet again the refereeing of this world cup proved poor. The 1-1 score was not the best France hoped for, especially as they face the unpredictably persistent sides of Korea and Togo.

The dollar staged another rally against the majors in the New York session, jumping to multi-week highs against the sterling, euro and yen. At the heart of the dollar’s strength remains sentiment that the FOMC will maintain its tightening stance at its next policy setting meeting in a few weeks. Traders bid the greenback higher ahead of tomorrow’s key US CPI report, which is forecasted to post modest declines. The May core CPI reading is expected to slip to 0.2% from 0.3%, while the headline report is seen at 0.4%, down from 0.4%. The dollar’s advance also comes amid recent declines in commodity prices, namely spot gold, which tumbled to a 2-month low beneath the $600/oz level. Global equity bourses also remain mired in heavy selling, with Japan’s Nikkei average plunging by over 4% -- its worst trading day in two years and the London FTSE losing 1.8% on Tuesday.

Economic data released earlier helped pushed the greenback higher, with an inflation report coming in stronger than expected. The May core producer price index edging up to 0.3%, besting both forecasts for a rise to 0.2% and April’s 0.1% reading. Meanwhile, the headline report was lower than forecast at 0.2%, compared with expectations of 0.5% and 0.9% from the previous month. The ex-autos retail sales report was in line with expectations at 0.5%, down from 0.7%. The headline figure was also expected at 0.1%, down from 0.5%.



Euro Tumbles to Multi-week Low

A combination of softer than expected European economic data and sentiment of further widening in the yield differential between US and Europe sent the single currency to its lowest level since late April. Germany’s June ZEW economic sentiment survey declined by more than forecast to 37.8, worse than consensus forecast of a drop to 45.0, from May at 50.0. Meanwhile, the current situation survey posted an improvement to 11.9, up from the previous report at 8.7.

ECB Governing Council member Mersch commented on policy, saying the Bank will take the necessary steps to ensure that inflation expectations are firmly anchored. He said the withdrawal of monetary accommodation has started and no end has been announced. Mersch said the ECB was absolutely open to switch to vigilant mode in the short term and would leave all options open. French Finance Minister Breton added that interest rates remain low despite gradual rise in ECB rates, and that inflation remains contained despite oil price rises. He was confident that the Eurozone economy can be resilient and absorb shocks such as oil and the recent appreciation in the euro.

EURUSD faces interim support at 1.2525, backed by 1.25 and 1.2465. Additional floors will emerge at 1.2430, followed by 1.24 and 1.2350. Resistance begins at 1.2575, followed by 1.26 and 1.2640. Subsequent ceilings are seen at 1.2680, followed by 1.27 and 1.2730.

Nikkei Slump Drags Yen Lower

Tokyo’s Nikkei average plunged by over 4% in Tuesday trading, marking its worst session since 2004. The Japanese equity slump carried over into the currency market, dragging the yen down past the 115-level to its lowest level in 7-weeks. In the session ahead, traders will turn their attention to the Bank of Japan monetary policy decision. Markets are not expecting the BoJ to change from it’s zero-rate stance just yet, but will closely scrutinize the accompanying statement for clues on when it may eventually shift.

Dollar/yen remains buoyed above the 115-level, with further gains targeting interim resistance near 115.50, followed by 115.80 and 116. Additional gains will face subsequent ceilings at 116.40, backed by 116.70 and 117. Support begins at 115, followed by 114.60 and 114.20. Further support will emerge at 114, backed by 113.75 and 113.30.

At 4:30 AM UK May CPI y/y (exp 2.1%, prev 2.0%) At 5:00 AM Germany June ZEW Economic Sentiment (exp 45.0, prev 50.0) Germany ZEW Current Situation (exp 10.0, prev 8.7) At 8:30 AM US April Business Inventories (exp 0.6%, prev 0.7%) US May Retail Sales ex autos (exp 0.5%, prev 0.7%) US May Retail Sales (exp 0.1%, prev 0.5%) US May core PPI (exp 0.2%, prev 0.1%) US May PPI (exp 0.5%, prev 0.9%) At 11:00 AM US former Fed Chairman Greenspan Speaks

The dollar remains buoyed against the majors as Fed officials repeatedly express concerns over inflationary pressures in the US economy. Given the rhetoric, markets are increasingly pricing in the possibility of a 25-bp rate hike in June. Accordingly, traders have rewarded the dollar, keeping it near one-month highs versus the euro around 1.2580 and holding the sterling around the 1.84-handle.

Economic data from the US slated for release in the coming session include April business inventories, May retail sales, May core PPI and PPI. The core producer price index for May is seen creeping up to 0.2% from 0.1%, while the headline figure is forecasted to slip to 0.5%, down from 0.9%. Meanwhile, retail sales figure is expected to decline to 0.1%, versus 0.5% from May while the ex-autos figure is seen posting a smaller drop to 0.5% from 0.7%. Fed speakers have repeatedly emphasized the importance of upcoming economic data in directing monetary policy. As a result, the key report this week will be the US CPI data due out on Wednesday.

Fed Chairman Bernanke refrained from discussing the outlook for the economy, inflation or interest rates in his speech earlier. Bernanke did comment on China, saying it would be well served by a more flexible exchange rate. He said a flexible market based currency regime would give China independent monetary policy. Bernanke said it was in China’s interest to create better balance in the global economy, and that better balance can be attained through greater currency flexibility from China and more US savings.

Euro Mired Near Lows

The euro continues to tread just above one-month lows versus the greenback beneath the 1.26-level. Traders will look ahead to economic data to be released later in the European session. Germany’s June ZEW economic sentiment is forecasted to slip to 45, down from 50.0 in May. The ZEW current situation report is expected to improve to 10.0, up from 8.7 a month earlier.

EURUSD finds interim support at 1.2550, followed by 1.2525 and 1.25. Additional floors will emerge at 1.2465, backed by 1.2430 and 1.24. Initial resistance starts at 1.26, backed by 1.2640 and 1.2680. Subsequent ceilings are seen at 1.27, followed by 1.2730 and 1.2765.



USDJPY Supported Above 114

Dollar/yen trades near its highest levels since late April around 114.50. BoJ Governor Fukui reiterated the Bank’s need to monitor whether market moves will have an impact on the real economy. He said that recent market moves reflect uncertainties over economic growth, but expects the global economy to continue steady growth. However, Fukui did not discuss the outlook for Japan’s interest rates.

Meanwhile, Japan’s Economics and Fiscal Policy minister Yosano said that zero rates are abnormal and that the BoJ will eventually need to abandon zero rate policy. He is confident that the BoJ will make broad, responsible decision on monetary policy.

USDJPY will encounter interim resistance at 114.75, followed by 115 and 115.25. Subsequent ceilings will emerge at 115.60, followed by 116 and 116.40. Support begins at 114.20, followed by 114 and 113.70. Additional floors are seen at 113.40, backed by 113 and 112.65.

Sterling/yen seems poised to test lower, with initial support eyed at 210.30, followed by 210 and 209.70. Subsequent floors will emerge at 209, followed by 208.50 and 208. Resistance is seen at 211, backed by 211.40 and 212. Additional ceilings are eyed at 212.60 and 213.