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The Pound has started to break lower after finding itself range bound between 1.6250-1.6350 overnight, as factory gate prices fell the most since 2001.

Talking Points
• Japanese Yen: Producer Prices Fell at Record Pace
• Pound: Factory Gate Prices Drop Most Since 2001
• Euro: Weighed By Concerns Over Eastern Europe
• US Dollar: University of Michigan Consumer Confidence On Tap

Pound Breaking Form Range on Drop In Factory Gate Prices, Euro Lower On Eastern European Concerns

The Pound has started to break lower after finding itself range bound between 1.6250-1.6350 overnight, as factory gate prices fell the most since 2001. U.K. June producer prices fell 1.2% on a yearly basis versus an expected -0.8% as the month saw a 0.2% decline. Costs for manufactured goods fell 2.0% over the same period supporting the BoE's argument that inflation will fall and remain below its 2.0% target during 2009. Input prices rising 1.5% on the month led to a less than expected fall of -11.0% versus a predicted -12.1% on a annualized basis. This could be a sign that deflationary pressures are abating and that prices may start to rise again beginning in 2010.

The BoE announced yesterday that it would keep its benchmark rate unchanged at 0.50% and not add to its quantitative measures despite speculation that it would do so. However, the MPC said that they would revisit the matter at their August policy meeting when they release their quarterly inflation report. Therefore, if the central bank draws concern from the drop in factory gate prices, then we could see an additional £25 billion added to their asset purchase program. The 20-Day SMA at 1.6370 has provided resistance for the GBP/USD making a re-test of support at 1.600 likely.

The Euro has continued its sharp reverse from yesterday where it reached as high as 1.4071 and is on the verge of erasing all of its prior gains. Traders ignored positive industrial production figures from France and Italy and chose to focus on a report that several Eastern European countries are negotiating credit limits with the IMF. French activity rose 2.6% in May which surpassed forecasts for 0.2% decline, while Italy had a flat reading versus the -1.1% that was expected. We could see the EUR/USD look to test support at 1.3795-38.2% Fibo which has held firm since May 20th.

The dollar is attempting to erase losses from yesterday as it finds support from a change in risk sentiment as deflationary conditions in Japan and a drop in Chinese exports raised concerns over a global recovery. The greenback continues to see whippy price action as market participants fluctuate on every piece of data that crosses the wires. The University of Michigan consumer confidence reading today could spark further volatility especially if we see the expected decline to 70.6 from 70.8. A drop in sentiment would be a sign that the weak labor market will remain an albatross for the economy and threaten to stall growth. The U.S. trade balance is also due and will provide insights into demand for U.S. goods from abroad. More talk of replacing the dollar as a reserve currency at the G-8 could limit support for the dollar, but forex traders may be numb to the rhetoric after weeks of headlines.

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