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The British Pound my see volatility in the upcoming session with the Bank of England's Quarterly Inflation Report likely to see downward revisions to GDP and inflation estimates. Euro Zone Industrial Production is also on tap, with expectations calling for the fourth consecutive double-digit decline in March.

Key Overnight Developments

• Japan's Annual Current Account Surplus Down 48.8% on Export Weakness
• Eco Watchers Survey Shows Japan's Merchant Sentiment Highest in a Year

Critical Levels


The Euro started off strong in Asian trading, testing as high as 1.3722 but slipping back for a more modest 0.2% net gain ahead of the opening bell in Europe. The British Pound trended higher, adding as much as 0.3% against the US Dollar.

Asia Session Highlights

Japan's Current Account surplus grew more than economists expected in March, printing at 1.48 trillion yen from 1.12 trillion in the previous month as compared to forecasts for a 1.21 trillion result. In annual terms, the surplus shrank -48.8% from a year before, the smallest drop in 5 months. Still, exports tumbled -46.5% in the 12 months from March 2008 on continued weakness in demand for the island nation's cars and electronics. Looking ahead, the road back promises to be a long one: the International Monetary Fund (IMF) has forecast that the world economy will contract by -1.3% this year while global trade volume (including both goods and services) will shrink by a whopping -11%; further, expectations for the recovery in 2010 are noticeably muted, calling for output to expand 1.9% and trade volume to add just 0.6%. This means that even if we assume that Japan has seen the bottom in overseas sales, firms will need to contend with substantially lower output levels for some time to come. The manufacturing sector employs over 27% of Japan's labor force, implying that the jobless rate is likely to remain high for the time being to keep a lid on a robust recovery in consumption and overall economic growth.

The Eco Watchers Survey of merchant sentiment saw respondent's view on current market conditions rise to the highest since a year before while the future outlook gauge surged to the highest since October 2007. The survey is based on questionnaires from sectors that are particularly vulnerable to turns in the business cycle such as retail, restaurant service, and taxi driving. Importantly, the readings remain below the 50 boom/bust level, suggesting the data continues to point to economic contraction, albeit at a slower pace. Rising stock prices and a robust government stimulus plan may have helped boost sentiment: the Nikkei has rallied 18.4% over the past two months; meanwhile, Prime Minister Taro Aso has pushed through a record-large spending package.

Euro Session: What to Expect

The Bank of England's Quarterly Inflation Report tops the economic calendar in European hours. The release is likely to reflect an outlook that encouraged policymakers expand credit easing measures with downward revisions to GDP and inflation estimates. The fallout in the industrial sector, which employs close to 20% of the UK labor force, is likely to keep a lid on a robust recovery as lackluster overseas sales of British manufactured goods have companies stick to lower output levels, keeping unemployment at elevated levels. Indeed, yesterday saw industrial production fell by a record -12.4% in the year to March while the jobless rate surged to an 11-year high at 4.7%. Grim labor market conditions will undermine fiscal and monetary efforts to reboot economic growth, weighing on consumption and thereby total output by trimming disposable incomes among the unemployed and encouraging precautionary saving among those still working. A survey of economists conducted by Bloomberg calls for the UK economy to shrink -3.7% this year while the International Monetary Fund calls for a -4.1% contraction.

Turning to the Euro Zone, Industrial Production is expected to have lost -17.6% in the year to March, the fourth consecutive month of double digit declines. Output has dwindled as the global economic downturn weighed on overseas demand. Exports contribute over 40% to the Euro Zone's overall economic growth, with other factors like investment and private consumption indirectly linked to foreign demand. The current fallout has led companies to scale back investment and cut labor costs, boosting unemployment and weighing on consumption. This bolsters expectations that the currency bloc will trail the US in recovering from current turmoil: most US economic growth is derived from domestic factors, while the Euro region will need to wait for the second-round effects of a recovery among its top trading partners to see a lasting return to positive growth.

To contact Ilya regarding this or other articles, please email him at ispivak at dailyfx dot com.