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The Euro has steadily traded lower reaching below 1.4090 ahead of the ECB rate decision but has started to consolidate despite the Euro-Zone unemployment rising to a decade high of 9.5% in May.

Talking Points
• Japanese Yen: Consolidating Above 96.50
• Pound: BoE Says Lending To Household Increased
• Euro: Unemployment Reaches Decade High
• US Dollar: Non-Farm Payrolls on Tap

Euro Heavy Ahead of ECB Decision As EZ Unemployment Reaches Decade High, PPI Record Low

The Euro has steadily traded lower reaching below 1.4090 ahead of the ECB rate decision but has started to consolidate despite the Euro-Zone unemployment rising to a decade high of 9.5% in May. Early forecasts were for a rise to 9.4% as companies continue to shed workers as they try and cut costs to survive the current recession. Meanwhile, producer prices dropped to a record low -5.8% in May from -4.6% on a yearly basis. The month saw prices unexpectedly fall 0.2% versus expectations of a 0.1% gain, as costs of intermediate goods dropped 0.3%.

The inflation report will give the ECB food for thought at today's policy meeting but shouldn't impact their rate decision with their consistent contention that deflation isn't a concern. The central bank is expected to keep rates on hold at a record low 1.00% which they have maintained is appropriate given the current environment. The committee will most likely stick to their measured approach and look to assess the impact of their covered bond purchase program before taking further action. The question is whether they have put in a floor on interest rates or is the door open for further easing. Therefore, we may see limited price action until President Trichet gives his statement and answers to questions from the press, who will certainly press him for clarification. The EUR/USD has held above the 20-Day SMA at 1.3987 and unless we see a break below there, upside potential remains. However, a dovish Trichet could sink the single currency and look for the pair to test 1.3784-38.2% Fibo of 1.2884-1.4340.

The pound has traded heavy throughout the overnight session falling below the 20-Day SMA at 1.6382 but saw its losses slowed after a BoE report showed credit to households increased. The central bank's quarterly report on credit conditions showed the supply of secured credit to households had increased but that unsecured credit was less available. Lenders also reported an increase in credit to the corporate sector which will help aide an economic recovery. However, new MPC member David Miles said that the banking sector is on life support and return of growth isn't a probable outcome, despite slight improvement in housing. Also, the PMI construction report unexpectedly showed a decline in the sector to 44.5 from 45.9. The dimming prospects for a robust recovery may continue to weigh in the pound. A clean break below the 20-Day SMA will most likely lead to a test of support at 1.6000.

The 4th of July holiday has set up an unusual economic calendar where we have the Non-farm Payroll release on a Thursday. Economists are forecasting that the economy lost another 365,000 jobs in June which would be 20,000 more than the month prior which could spark risk aversion and dollar support. However, following six months of losses above 500,000 consecutive periods below the lofty number could be an encouraging sign for traders. We may see the focus turn to the unemployment rate which is predicted to reach a 26 year high of 9.6%. Initial jobless claims will also add some insight to the labor market and another week above 600,000 will help dim the outlook for a recovery. The dollar has been supported overnight despite a report that China will allow companies to undertake settlement of cross-border trade in the yuan and offer them tax breaks, seeking to reduce the reliance of importers and exporters on the U.S. dollar.

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To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com