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The Euro has started to find a bid tone after trading within a range of 1.4015-1.4065 earlier as a relatively empty economic calendar failed to impact price action.

Talking Points
• Japanese Yen: Inflation Falls at Record Pace
• Pound: Remains Supported By 20-Day SMA
• Euro: Choppy As Global Growth Outlook Dims
• US Dollar: Personal Spending and Income On Tap

Euro, Pound Look to Extend Gains Despite Increase in Global Growth And Deflation Concerns

The Euro has started to find a bid tone after trading within a range of 1.4015-1.4065 earlier as a relatively empty economic calendar failed to impact price action. The final reading for French GDP was unchanged at -1.2% in the first quarter from preliminary readings. Meanwhile, German CPI is still due to cross the wires and may have a significant impact on price action as deflation concerns have begun to re-emerge. The EUR/USD is back above 20-Day SMA at 1.4009 which could lead it to re-test the 6/3 high of 1.4340.

Yesterday's pick up in risk appetite was curbed by the weak fundamental data that emerged from Asia as a global recovery came under question. New Zealand's GDP shrank for a fifth straight quarter by 1.0% versus expectations of 0.7% as consumer's and businesses continued to retrench. The impact on the credit crisis on future demand is still the big unknown and if we see continued precaution from consumers then any potential recovery will be limited. Another factor that remains a concern is the continuation of deflationary pressure which will cause consumer's to refrain from making purchases in hopes of obtaining a lower price in the future. A record 1.1% drop in Japanese inflation helped rekindle these concerns. This follows the Fed maintaining their contention that inflation will be subdued for sometime in the U.S. All of these factors could limit the demand for carry trade and limit risk appetite. Therefore, we could see the Euro, the Australian and New Zealand Dollar negatively impacted if these concerns grow.

The Pound continued to move higher after it reversed its earlier losses yesterday to push the GBP/USD back above the 20-Day SMA. The technical level has continued to provide solid support for the pair and as long as it remains above it our previous bearish bias will come under question. However, the BoE has recently warned that U.K. banks may need to curb lending by as much as 500 billion pounds over the next four years as the government removes aid. This could limit future growth for the country as it is already facing the prospect of an increasing tax burden. Therefore, despite a possible re-test of the 6/24 high of 1.6604, the path of lest resistance may still be to the downside over the medium term.

A pick up in risk appetite yesterday weighed on the dollar and we are still seeing that sentiment impact flows today. For the most part price action has been choppy as forex traders are still looking for a long-term direction for the greenback. Weak job data continues to hold back stronger bullish dollar sentiment and until we see a peak in the level of unemployment we may continue to see flip flopping sentiment. Today's personal income and spending numbers are expected to gain by 0.3% which will raise domestic growth prospects. However, the stimulus plan is still having a significant impact on these figures which may lesson their relevance as a measure of long-term sustainable growth. Lower U.S. futures may be a sign that we could see a reversal in equity markets today which could add dollar support on the day.

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