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The Euro continued to find support overnight as it set a new yearly high of 1.4091 on the back of an improvement in April German retail sales and rallying equity markets.

Talking Points
• Japanese Yen: Industrial Production Rises Most in 56 Years
• Pound: Higher On Rising Home Prices
• Euro: Sets Fresh Yearly High
• US Dollar: GDP On Tap

Euro Sets Fresh Yearly High As Equities Continues To Rally, Will U.S. GDP Add To Bullish Sentiment?

The Euro continued to find support overnight as it set a new yearly high of 1.4091 on the back of an improvement in April German retail sales and rallying equity markets. Consumer consumption in the Euro--zone's largest economy rose for the first time in four months, increasing by 0.5% following a 0.4% decline the month prior. Warmer weather and Easter holiday shopping helped increase demand but may have skewed the figures. Meanwhile, forex traders ignored a record low Euro-zone CPI-estimate report which showed that inflation is expected to fall to 0.0% in April following 0.6% the month prior.

The central bank may not be too concerned with falling prices and deflation concerns now that we have seen oil reach back above $60 bbl and demand start to pick up. This was evident by comments from ECB member Vitor Constancio who stated that For two years we won't be close to the official goal for inflation, but there aren't significant risks of a deflationary spiral. Nevertheless, falling prices will continue to shrink profit margins for companies which are now facing increasing input costs which could lead to more job losses going forward. The Euro should continue to find support as demand for equities is expected to persist through U.S. trading and the EUR/USD has strongly been correlated with DJIA over the past year. The next level of resistance is at 1.4188 the 50.0% of 1.6040-1.2326.

The pound continues to trade higher as a rebound in home prices and increasing risk appetite has pushed the GBP/USD back above 1.6000 to reach above the 5/27 high of 1.6079. Nationwide LLC showed that house prices rose 1.2% in May as thawing credit markets have started to fuel demand. The BoE continues their quantitative easing efforts in hopes of driving down interest rates and providing liquidity to the market. Meanwhile, the Gfk consumer sentiment reading remained unchanged at -27 as Britons continue to look for positive signs that the recession is bottoming. If the housing sector stabilizes then we could see a sharp pick up in optimism which will only add to the current sterling bullish sentiment. The next resistance level is at 1.6148 the November 5th, 2008 high, trades should be cautious as the 38.2% Fibo level of 2.0160-1.3494 at 1.6048 is a formidable resistance level and without a clean break above downside risks will remain.

The dollar remains under pressure as it continues to be hindered by the reversing of the risk trade. Indeed, yesterday's rally in equities to end the U.S. session has carried over into Asian and Europe. A jump in Japanese industrial production added to the improving global picture which could continue today with the U.S> GDP reading. Forecasts are for the second reading of growth in the U.S. to be revised higher to -5.5% from -6.1%. A 51.8% decline in private investment was cited as the main driver of the contraction, so look for a revision of such a large shortfall. Chicago PMI and University of Michigan consumer confidence are also expected to show improvements which will add to building optimism of a recovery and could continue to weigh on the dollar.

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