By DailyFX – US Dollar – As we said yesterday, the dollar's direction in today's session would be contingent on core consumer inflation data. … … While the headline figure edged higher than expectations with 0.6 percent growth over April, the annual measure met expectations with a rise to a 3.6 percent clip.

Making no small contribution to the overall reads were
the sudden and exaggerated advances in energy products like unleaded gas
whose price grew nearly 9percent over the period. However the Fed has
long since tempered its opinion of the volatile class of consumer goods
and turned to the core read that strips the inflationary gauge of
volatile energy and food goods, and this is were the currency market
took heed. Against expectations for the monthly figure to abate
slightly in April to 0.2percent, traders and economists were surprised
with a repeat 0.3 percent print. Putting this into better perspective,
the year-over-year measure advanced from a 2.1percent rate to 2.3
percent – well beyond the central banks 2 percent comfort level. This
will give FOMC members more to consider come the June meeting, though an
additional 25 basis point hike is far from assured. Given yesterday's
subdued core producer price gauge and the fact that annual wages
continue to outpace the growth in headline consumer inflation over the
past year, it is still within the Federal Reserves means to consider a
halt to its thus far, uninterrupted 16 session hawkish stance. Until
that happens though, currency traders will look for any further
fundamental reason to abandon their recent overwhelming bearishness.
With little in the way of market moving releases until next Thursday's
first revision of GDP, there could be a reversion to dollar selling
without influence from outside the economic calendar.

Euro – The sole piece of market worthy Euro data that was released for
today's session, that of April inflation, seemed to fall on deaf ears
despite its relevance for monetary policy for the European Central Bank
in the months to come. Inflation in the group of economies accelerated
a faster than expected 0.7 percent month-over-month, while the annual
gauge met the market's expectation of a 2.4 percent pace. While the
monthly change was the largest in over six years, the market's
attention was thrown to the annualized headline figure as it moved
further away from the central bank's 2-percent target. The
implications of this indicator on the probabilities of future policy
shifts were clear. Expectations of a rate hike from the ECB policy
group at the June 8th meeting have long taken the majority in futures
trading. Elsewhere in European financial markets, the region's equity
indices marked their biggest decline in three years as inflationary
fears in Europe and the US produced expectations of rate hikes in the
globes largest economies that would sabotage plans for business
investment that has resulted from booming firm profits. The French CAC
40 Index plunged 3.18 percent while the German DSX Index dove 3.4
percent.

British Pound – While the bulk of the UK's economic data was
negative, a spark of bullishness was found with the release of the
minutes from the Bank of England's May 3-4 meeting. The most
remarkable event in the text was the split in officials who wanted to
change the rate and those that wanted to keep it in unchanged. In his
final meeting, member Stephen Nickell cast his vote for a reduction, a
stance he has held since the December meeting. However, leaving the
usual pack of neutrals was David Walton who voted for a rate hike. The
minutes said of Walton, “one member felt that the balance of risks to
inflation relative to the 2 percent target had shifted a little too much
to the upside*” After the release, it seemed investors'
expectations of a rate reduction in the near future went out the door
with Nickell; and with Walton the new contrarian; more bets have been
place on a rise from the MPC. The rest of the data for the session was
a bitter read. Employment figures showed the number of jobless
continued to grow in April as manufacturers sacked workers in an effort
to withstand higher costs and sapped domestic demand. Jobless claims
rose 7,700 to the highest level in nearly three years, while the
claimant count rate held at 3.3 percent. A month back, the International
Labor Organization's measure of the percentage of jobless in March
rose from 5.1 to 5.2 percent. The final nail in the economic coffin was
the reduced pace of quarterly income growth in average earnings and
manufacturing wages for March to 3.8 and 1.9 percent respectively.

Japanese Yen – The Yen was left at the mercy of the crosses today as
traders sidelined the currency, deciding to ignore today's releases in
anticipation of the coming days' GDP and department store sales data
as well as a BoJ policy announcement. Economic data released in the
overnight Tokyo session generated little enthusiasm for the world's
second largest economy. The final revision of March industrial
production was the biggest indicator for the day. As expected, the
monthly and annualized reads posted figures that were unchanged from
their respective preliminary reads. Instead of taking positions on this
drab data, market participants are awaiting the fundamental rush in
Thursday's and Friday's sessions. Expected for tomorrow are
April's nationwide and Tokyo department store sales. Often a good
leading indicator of household spending, the figures will be interpreted
for possible implications to whether consumer spending is adding to
inflationary pressure at a pace quick enough to justify a rate hike from
the usually mum BoJ. This may receive little attention however from
currency traders as the following day will bring a first quarter
economic output number that is expected to plunge from the previous
three months and a policy announcement that could illuminate the central
bank's thoughts on when a rate hike would be necessary.

Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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Antonio Jose Fernandes Sousa
FXCM | Research Team
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