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The euro reached as high as 1.3388 before the German unemployment report showed the country lost another 58,000 jobs and saw its unemployment rate rise to 8.3% which is the highest since December, 2007. The CPI-estimate holding at 0.6% also added to bearish sentiment as the forecast were for a rise in inflation to 0.7%.

Talking Points
• Japanese Yen: BoJ Leaves Rates Unchanged At 0.10%
• Pound: Consumer Confidence Rises To Highest In a Year
• Euro: German Unemployment Rises To 8.3%
• US Dollar: Personal Income and Spending On Tap

Euro Weighed By Rising German Unemployment, Will ECB Initiate QE Measures?

The euro reached as high as 1.3388 before the German unemployment report showed the country lost another 58,000 jobs and saw its unemployment rate rise to 8.3% which is the highest since December, 2007. The CPI-estimate holding at 0.6% also added to bearish sentiment as the forecast were for a rise in inflation to 0.7%. Although, prices holding steady will help ease some deflation concerns, markets were ready to eliminate the concern if it saw price pressures increasing. Therefore, expectations will remain that he ECB could initiate non-standard measures as soon as their policy meeting next week.

Indeed, we have seen a pick up in rhetoric from the ECB heading into the May 7th decision which has provided conflicting views and led markets to believe that there is division amongst members on the future course of action. Yesterday, Juergen Stark may have cleared up the picture when he stated we will make a decision about additional non- standard measures, which we will implement when the lower interest-rate limit is reached. If we examine all the recent rhetoric we come away with a few consistencies in that, many feel that interest rates should not approach zero and that non-standard measure shouldn't be implemented until the traditional measures have been exhausted. Therefore, we expect the central bank to cut rates by 0.25% next week and leave decisions on quantitative easing efforts until the next meeting as they continue with their measured approach and take stock of past efforts. We could see the Euro find support on such a scenario if the committee signals an end to their accommodative monetary policy. However, if markets believe that the ECB is remaining behind the curve the declining outlook for the region's economy could lead to euro weakness.

The pound has also seen a reversal of fortunes as it has fallen 100 pips after reaching a two week high of 1.4949. We could be seeing profit taking here as the imminent bankruptcy of Chrysler and the swine flu pandemic alert level being raised to the second highest at 5. Regardless, equity markets are still higher on the day ion Europe and U.S> futures are pointing toward a higher open which could continue to provide sterling support. Positive fundamental releases could also add to a bullish case as the Gfk consumer confidence reading rose to -27 which was the highest in a year. Additionally, the 0.4% decrease in the Nationwide house price gauge was les s than forecasts of -1.2% and follows a 0.9% increase the month prior. Stabilization in the housing market will go along way in helping the economy find a bottom which could be a catalyst for increasing support for the pound.

A full economic docket today will provide further insight into the economy and may add to increasing optimism that has been built on the improvements in consumer confidence and personal consumption adding to dollar weakness. However, inline prints of personal income and spending in March which is forecasted to have fallen by 0.2% and 0.1% respectively, would contradict with the 2.2% jump in personal consumption component in the GDP report. Additionally, initial jobless claims are expected to remain at 640,000 as the labor market continues to be negatively impacted by the recession which could weigh on consumer spending going forward, and may extend the current downturn. Conversely, forecasts are for the Chicago PMI reading to improve to 35.0 from 31.4 adding to signs that activity is beginning to pick up as credit markets loosen which could help stem future job losses. This would support the FOMC's contention that the economy is seeing a slower pace of contraction which led them to refrain from adding additional measures to their current quantitative easing efforts.

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