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The Pound pushed back above 1.6200 after falling below 1.6000 early yesterday as a pick up in risk appetite and overbought conditions inspired sterling bulls.

Talking Points
• Japanese Yen: Found Resistance at 93.60
• Pound: Higher Ahead Of BoE Rate Decision
• Euro: Higher As ECB Upbeat in Monthly Report
• US Dollar: Initial Jobless Claims On Tap.

Pound Soars Ahead Of BoE Rate Decision, Euro Finds Support As Risk Appetite Returns on Alcoa Earnings

The Pound pushed back above 1.6200 after falling below 1.6000 early yesterday as a pick up in risk appetite and overbought conditions inspired sterling bulls. The cable continues to find support ahead of the BoE rate decision where the central bank is expected to keep their benchmark rate on hold at 0.50%. Meanwhile, the U.K. Visible trade balance showed that the deficit narrowed to -£6263 from -£7137 as imports declined raising concerns over domestic growth.

The BoE may potentially add to their bond purchase program by as much as £25 billion as they look to take a final step in trying to ease credit conditions and stimulate growth. Banks still remain reluctant to loan money which has started to thwart the recovery in the housing sector. Indeed, we saw Halifax report home prices fell in June by 0.5% yesterday. The added measure could be seen as a negative and a sign that downside risk remain for the economy and a recovery isn't a forgone conclusion. Fears of a double dip recession is starting to emerge and if we see the efforts of the central bank fail to thaw credit markets and inspire growth then a depression scenario could become a possibility. However, if the MPC stands pat or closes the curtain on their quantitative efforts due to signs that economy is stabilizing and growth is returning, then we could see continued bullish pound sentiment. At the current G-8 meeting global leaders are talking of reversing recent stimulus efforts but still see the recovery as too fragile to consider initiating at this time and we could see similar talk from the BoE. 1.600 continues to provide solid support for the GBP/USD and the current bounce may lead to a test of resistance at 1.6372-20-Day SMA.

The Euro soared over 100 pips and threatening to test 1.4000 led by the first advance for equities in six days and an upbeat ECB monthly report. The central bank in their monthly report stated that current interest rates are appropriate and that economic risk remained balanced. Activity is expected to fall at a slower pace throughout the remainder of the year with growth returning by mid 2010. However, the German trade balance widened to 9.6B from 9.4B as imports fell 2.1% outpacing a small gain in exports. Final German CPI figures for May showed inflation at 0.1% which is on the verge of following the regional reading into negative territory. The central bank in their report stated that negative inflation will be a temporary phenomenon and will reverse as growth returns.

The dollar has come under pressure as risk appetite has picked up on the back of better than expected results from Alcoa. The world's largest aluminum maker kicked off earnings season on a positive note by posting a smaller than expected loss and predicted that Chinese and U..S. stimulus will help the company start generating cash flow. Corporate earnings will have a significant impact on risk appetite and dollar sentiment which makes 3COms release worth watching today. The economic docket will bring initial jobless claims which could also add to prevailing optimism if we see a print below 600,000. Conversely a worse than expected print could raise concerns that continued weakness in the labor market will limit the scope of a recovery and spark safe-haven flows. Wholesale inventories and ICSC chain store sales will provide insight into domestic demand and the potential earnings results from retailers.

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