By DailyFX - US Dollar - The dollar advance yesterday triggered by core inflation data couldn't hold back the resolute bears in today's session as...

... mixed indicators and Fed chatter left the currency to the overriding bearishness held for the past three months.

The newswires lit up early in the New York session with a sizable increase in initial
jobless claims to 367,000 due to the temporary government shutdown in Puerto Rico.
A few hours later, the Conference Board's leading indicator's index produced a
sizable dollar sell off when the economic sentiment gauge contracted 0.1 versus
expectations of a slight rise. Six of the 10 components comprising the index
declined with notable drops in building permits and consumer confidence, suggesting
the Fed's aggressive tightening policy is producing its desired effects in cooling
aggressive consumer spending. This was very different from what Richmond Fed
President Jeffrey Lacker was suggesting of inflationary pressures however in an
address to the media. In regards to yesterday's CPI read and a first quarter of
annualized price growth that ran at a 16 year high, 5.1% pace, Lacker said
inflationary pressures were 'borderline' and 'containing inflation has to be the
primary focus' for policy makers. Lacker delivered these comments just before the
Philly Fed revealed that manufacturing in the region accelerated faster than
expected to produce a 14.4 read in May following Aprils 13.2 figure. This increase
came despite a doubling in the prices gauge to a seven-month high due to higher
costs of energy and other key commodities. Even the Fed Chief Ben Bernanke got his
two cents in. At a Chicago Fed conference on banking regulation, Bernanke said that
the housing market is cooling at a 'moderate' tempo that should produce a soft
landing. As the housing market tempers, officials believe consumer spending will
follow; which would justify the Fed's aggressive two year policy and a shift to a
neutral position. Dollar-side activity should be reserved tomorrow with the only
indicator of significance, the Richmond Fed manufacturing index, drawing little
attention.

Euro - A thin calendar kept euro action reserved Thursday with Italy's trade balance
the only indicator of relevance for the currency markets. According to the
government release, the familiar trade deficit contracted to its lowest level in
three months to 1.94 billion euros. Real euro positioning will be procured tomorrow
with German and French indicators bringing volatility back into the pair. German
producer prices are expected to have accelerated in April by 0.7% after record high
energy and commodity prices pushed up firm's bills. This inflationary assist will
add to the consumer price gauge that expanded 0.4% over the same month and nudging
the annualized figure to the ECB's target 2 percent. Elsewhere, France will release
its preliminary first quarter GDP figures. Expectations are running high for the
output indicator, with the market consensus of the quarterly measure hovering around
0.6 percent that puts the longer, annual estimate up to 1.8 percent. This would be
the quickest pace of economic expansion in Europe's third largest economy since the
final three months of 2004.

British Pound - Action in the sterling, like the euro, was reserved with only a
retail sales figure offered up for market digestion. Retail sales for the month of
April grew a greater than expected 0.6 percent, but fell well short of the revised
0.9 percent rise in March. Component sales data showed within the non-food sector,
sales at household and electronic goods stores advanced 3.3 percent and department
stores achieved a 1.4 percent rise. This was the third consecutive month of
increasing sales suggesting consumer spending in the economy will help prop up
growth for the current year. Last year, the economy grew at a 1.8 percent clip, the
slowest pace in 13 years as spending in the government and consumer sectors slowed.
April's retail figures could be evidence to the MPC and currency traders that the UK
consumer will help to pull the nation's economy out of its slump. Rousing the funds
and confidence for consumers to boost spending last month was a combination of wage
gains and a 2 percent surge in the HBOS housing price indicator, a two year high.
The housing market has steadily improved since the Bank of England decided to cut
the overnight repot rate a quarter percent. Now the central bank is expecting
consumer spending to contribute to economic expansion of around 2.6 percent for the
current year while predictions for the consumer price gauge are breeching the 2
percent target for the same period. This mixture of healthy growth and inflation is
presumably the scenario MPC member David Walton foresaw when he cast the sole vote
for a rate hike last week at the BoE's policy meeting.

Japanese Yen - As expected, the yen gained little ground today in trading as the
market pushed aside poor nationwide and Tokyo department store sales figures in
favor of speculating on tomorrow's first quarter economic growth figure and Bank of
Japan monetary policy announcement. Nationwide department store sales last month
dropped 0.6 percent, marking the first decline in 3 month. Sales in the nations
capital fell 0.5 percent. This was an ominous indicator as it is one of the last
pieces of data BoJ officials will see before their policy announcement. The more
significant indicator for analysis however will be tomorrow's GDP number. Economic
output in the world's second largest economy is expected to slow to 1.1 percent,
nearly a fifth of the previous quarter's pace. This may create some reservation
from the cautious policy makers who have so far classified the economy as
'recovering.' Nonetheless, many economists expect the policy body to upgrade the
nation to 'recovering' and continue preparing financial systems and investors for
the inevitable interest rate hike off of zero percent.





Antonio Jose Fernandes Sousa
FXCM | Research Team
32 Old Slip | 10th Floor
New York, NY 10004
Phone: (646) 432-2245