US Dollar Holds on to European Session Gains as Consumer Confidence Improves, Ahead of G8 Meeting

The US dollar was the strongest of the majors on Friday as the currency staged a solid rebound against the Canadian dollar, Swiss franc, British pound, euro, Japanese yen, and Australian dollar. Looking to the economic data on hand, the University of Michigan’s consumer confidence index rose slightly less than expected to 69.0 for the month of June from 68.7. That said, this reading still marked a 9-month high, and a breakdown of the report revealed an interesting shift. Indeed, in recent months we’ve seen that overall increases in the index were led by optimism about the economic outlook. However, this time around we saw a rather sharp rise in sentiment on current conditions to a 9-month high while confidence in the economic outlook actually fell for the first time since February. Meanwhile, rising gasoline prices seem to be spurring inflation concerns, as inflation expectations for 1-year ahead and 5-years ahead rose to 3.1 percent, up from 2.8 percent and 2.9 percent, respectively.

The Group of 8 (G8) will meet over the weekend, and while it may ultimately prove to be a non-event, traders should keep an eye out for the communiqué as indications that exit strategies for the stimulus measures enacted by members are being plotted could provide a boost to risk appetite when trading resumes on Sunday. Though highly unlikely, discussions about currencies would be sure to shake up the markets as well.

Next Wednesday, the latest inflation figures for the US are forecasted to show slight increases on a monthly basis, but clear weakness on an annual basis. Indeed, headline CPI is projected to have risen 0.3 percent during May, while the core measure, which excludes food and energy, is anticipated to rise 0.1 percent. Meanwhile, headline CPI is expected to have fallen 0.9 percent in May from a year ago, the steepest drop since February 1950, compared to a decline of 0.7 percent in April. On the other hand, core CPI may have only eased to a 1.8 percent annual pace of growth from 1.9 percent, suggesting that volatile commodity prices are the sole reason for the contractions in headline inflation. Weaker than expected results have the potential to stoke deflation fears, but overall, the FX markets haven’t shown a strong reaction to past CPI reports, and this time around we may see more of the same.

Euro Tumbles as Industrial Output Falls by Record, Swiss Franc Down Ahead of SNB Decision

The euros ended the day down against the greenback on Friday as the US currency staged a broad rebound across the majors. Fundamentals were also working against the euro, as Eurostat said that industrial production in the Euro-zone fell 1.9 percent during April, bringing the annual rate down to a record low of -21.6 percent and highlighting the impact of the global economic slowdown on export-reliant economies.

Meanwhile, the Swiss franc was one of the weakest major currencies on Friday, and it will face very high event risk next week. On Thursday, the Swiss National Bank is like to leave their 3-month LIBOR target range unchanged at 0.0 percent – 0.75 percent, but the thing to watch for in the SNB’s subsequent policy statement is talk of FX intervention. Indeed, the SNB’s last statement on March 12 indicated that the central bank wanted to “prevent any further appreciation of the Swiss franc against the euro” in an effort to “counter the risk of deflation and of a dramatic deterioration in the economy.” Similar comments have the potential to drive the Swiss franc lower upon this 3:30 ET release, while a neutral policy stance and no mention of currencies will likely lead the Swissie higher.

British Pound Backs Down, BOE Minutes to Clarify Policy Bias Next Week

The British pound experienced broad weakness on Friday after spending most of the week as the strongest of the majors. Next Wednesday, the minutes from the Bank of England's June 4 meeting may not be as market-moving as they've been in the past, as there has already been significant detail revealed about the mindset of the Monetary Policy Committee (MPC). Indeed, we already know that the BOE has decided to expand their quantitative easing (QE) program by 50 billion pounds to 125 billion pounds, but there are indications that they may increase the scope of the program even further as they recently published a paper in which they sought comments on the prospect of including purchases of secured commercial paper in their Asset Purchase Facility (APF). That said, the inclusion of secured commercial paper doesn’t necessarily mean that they will allocate more money toward the APF, and this is a detail that will be critical to British pound price action as past QE announcements have weighed on the currency.

Japanese Yen Remains Mixed as US Equities Consolidate Below Key Highs

The Japanese yen ended on a mixed note on Friday, falling against the US dollar and New Zealand dollar while gaining against the Canadian dollar. The moves suggest that risk appetite remains on edge, which was also evident in equities as the DJIA closed at the highest level since January 6, but still remained in consolidation mode below 8800. This weekend the Group of 8 (G8) will meet, and while it may ultimately prove to be a non-event, traders should keep an eye out for the communiqué as indications that exit strategies for the stimulus measures enacted by the member countries are being plotted could provide a boost to risk appetite when trading resumes on Sunday. Though highly unlikely, discussions about currencies would be sure to shake up the markets as well.

Next Monday evening, the Bank of Japan is anticipated to announce that they are leaving rates unchanged at 0.10 percent, but this is not the part of the central bank’s announcement that will garner the most attention. Instead, the FX markets may only respond to the sentiment reflected in their subsequent policy statement. After the BOJ’s last meeting, they raised their outlook on the economy for the first time in nearly 3 years, saying that “economic conditions have been deteriorating, but exports and production are beginning to level out.” There is speculation that the BOJ will upgrade their outlook once again, and if this is the case, the Japanese yen could gain on a very short-term basis. On a longer-term basis, though, risk trends have been driving price action and the impact of positive BOJ commentary may not go very far.

Terri Belkas is a Currency Strategist at FXCM.