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The Pound has started to give back some of its gains after reaching as high as 1.6443 following the release of the U.K. trade balance report and manufacturing numbers.

Talking Points
• Japanese Yen: Stalled at 98.10
• Pound: Industrial Production Improves
• Euro: Growth Remains A Challenge For Euro-zone
• US Dollar: U.S. Trade Balance On Tap

Pound, Euro Still Supported By Risk Appetite, But Will Rising Oil Prices Dim Outlook For Recovery?

The Pound has started to give back some of its gains after reaching as high as 1.6443 following the release of the U.K. trade balance report and manufacturing numbers. Output in the U.K. rose for a second month by 0.3% as demand for automobiles grew on the back of easing credit markets. Meanwhile, the visible trade balance widened to -£7000 from -£6589 as rising imports outpaced a slight increase in exports. The lack of an improvement in demand for British goods considering the improvement in global conditions may be a concern for traders and adding weight to the sterling.

The sterling fell nearly 100 pips after the release of the data but it may be attributed to profit taking as the GBP/USD rose over 600 pips in the past two days. It is clear that forex traders are looking past the political turmoil in the country and focusing on the improving fundamentals which continued with the growth in manufacturing output in April. The mining and oil sectors saw 2.4% and 2.5% gains during the month as rising commodity prices have spurred the increase in activity. Indeed, oil has risen back above $70 bbl which has helped pushed energy equities higher and the increase in risk appetite has been a driver of bullish cable price action. However, the expectations of rising gas prices will dim outlook for consumer spending and could slow the pace of a global recovery. Therefore, we could start to see rising concerns begin to weigh on currencies that have benefited from the increasing optimism.

The Euro has also come under pressure after reaching as high as 1.4143 during overnight trading as we have started to see some profit taking. There was mixed data from the Euro-zone as French industrial production unexpectedly fell by 1.4% versus expectations if a 0.2% gain. Growth remains a challenge for the country as the Euro-zone finds itself in the worst recession since WWII. Meanwhile, Italian output rose by 1.1% which was more than the 0.8% that economists forecasted and the highest in a year. However, it ended 11 straight months of contraction. Indeed, growth figures for the country showed that the economy contracted by 2.6% in the first quarter as global demand has shrunk for Italian goods. The Euro has been tied to risk appetite and with U.S. futures pointing toward a higher open, we could see Euro strength return.

The dollar continues to be on the run as demand for equities and commodities continue to plague the greenback. Event risk today will come in the form of the trade balance, monthly budget statement and the Fed Beige book report. The U.S. trade deficit is expected to widen to $29.0 billion from $27.6 billion as consumer demand starts to improve as the economy stabilizes. Meanwhile, traders will be closely watching to see if government spending is on a decline after the Obama administration has pledged significant cost cutting in an attempt the trim the deficit in half by the end of the President's term. Fears are growing that if the government cuts spending drastically it may slow the recovery process for the economy. The biggest threat to the dollar may come from the Fed Beige book as the forward looking indicator will show how the 12 federal districts are performing and the expectations for the various regions. It typically generates a reaction from equity markets which could impact dollar price action.

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