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- Euro Under Pressure After Euro-zone GDP Contracts A Record 2.5% - EUR/CHF Breakout Potential
- British Pound Holds Within Rising Channel - UK CPI, BOE Meeting Minutes Could Trigger Breakdowns
- Japanese Yen Gains as FX Carry Trades Pull Back - Japanese Q1 GDP May Post Record 15.9% Contraction

US Dollar Gains as Foreign Demand for US Assets Improves, CPI Contracts by the Most Since 1955
The US dollar benefited from the drop in US equities on Friday, as the currency gained against every major but the Japanese yen. There was a flurry of economic releases, none of which were highly market-moving. The US consumer price index (CPI) stagnated during the month of April, bringing the annualized pace to -0.7 percent - the lowest since June 1955 - from -0.4 percent. On the other hand, the core measure - which excludes volatile food and energy costs - rose 0.3 percent, leading the annualized rate to rise to 1.9 percent from 1.8 percent. While the headline results only add to concerns that the US is on a one-way track to deflation, the fact that core CPI remains at relatively robust levels is enough to allay more serious fears.

Meanwhile, TIC flows showed that foreign demand for US financial assets, including equities, notes and bonds, rose more than anticipated in March to a net $55.8 billion, up from $22 billion in February. Likewise, manufacturing sector conditions were better than expected, as industrial production fell 0.5 percent in April, the smallest drop since July 2008, while the New York Fed's Empire index rose to -4.55 for the month of May from -14.65.

Euro Under Pressure After Euro-zone GDP Contracts A Record 2.5% - EUR/CHF Breakout Potential
European data was deeply disappointing this morning as Euro-zone GDP fell more than expected in Q1 at a rate of 2.5 percent, marking the sharpest drop since recordkeeping began in 1995. Indeed, growth in the region's economies took a hit as both foreign and domestic demand fell in light of the financial crisis. In Germany, the Euro-zone's biggest economy, GDP plunged 3.8 percent during Q1 from the previous quarter, the worst drop since recordkeeping began in 1970, while Italian GDP slumped 2.4 percent, the steepest decline since records began in 1980. Overall, the news indicates that the European recession deepened during Q1, contrary to what some ECB officials have said, raising the odds that the ECB will consider cutting rates further or will need to take more drastic steps than their current plan to buy 60 billion euros worth of covered bonds.

Meanwhile, the Swiss franc fell against many of the majors a day after the Swiss National Bank (SNB) verbally intervened in the market. Since the SNB's first intervention announcement on March 12, EUR/CHF has retraced approximately 50 percent of the pair's rally between March 10 and March 17, and perhaps in an effort to stop the decline, SNB Governing Board member Thomas Jordan said that the central bank was implementing franc policy and that the SNB wanted to prevent further franc appreciation. Jordan also said that while it was hard to forecast, he saw a turning point for the Swiss economy in 2010 and noted that Swiss credit market conditions were still very good. That said, EUR/CHF has spent a lengthy amount of time consolidating within a very tight range. Indeed, the Bollinger Bands width is now at the lowest level since November 2007, which was followed by a rapid 300 point break lower, suggesting that EUR/CHF could be facing a break in the near-term as well, though the move has the potential to be bullish or bearish.

British Pound Holds Within Rising Channel - UK CPI, BOE Meeting Minutes Could Trigger Breakdowns
The British pound ended Friday down against the US dollar and Japanese yen and made headway versus the rest of the majors, but for what it's worth, GBP/USD is still holding within the same rising channel it has traded within for nearly a month. There will be a variety of triggers for a GBP/USD breakdown next week though, as inflation data and central bank-related news tends to spur volatility. On Tuesday, the UK's consumer price index (CPI) reading for the month of April is expected to rise 0.4 percent, the third straight increase. However, the annual rate of growth is forecasted to fall to a more than one-year low of 2.4 percent from 2.9 percent, keeping inflation within the central bank's acceptable range of 1 percent - 3 percent, but above their 2 percent target. On Wednesday, the minutes from the Bank of England's May 7 meeting may not be as market-moving as they've been in the past, as there has already been significant detail revealed about the mindset of the Monetary Policy Committee (MPC). However, the growth and inflation outlooks published in the BOE's Quarterly Inflation Report suggest that the central bank may be open to expanding their quantitative easing program later on. If the minutes from the BOE's most recent meeting reiterate this, the British pound could pull back very sharply.

Japanese Yen Gains as FX Carry Trades Pull Back - Japanese Q1 GDP May Post Record 15.9% Contraction
The Japanese yen was the strongest of the majors on a day that risk averse selling weighed on FX carry trades, making it all the more clear that fundamentals are not driving price action for currencies like the yen and the US dollar. This point could be highlighted on May 19 at 19:50 ET, when Japan's Cabinet Office will release preliminary growth readings. After three consecutive quarters of contraction, the outlook doesn't look good. There are signs that businesses are suffering considerably at the hands of waning domestic and foreign demand. Consumers have very little to work with these days, as the jobless rate has slowly climbed to a nearly five-year high, and perhaps even worse, cash earnings growth contracted by 3.7 percent in March from a year earlier, the sharpest drop since 2002. Meanwhile, Japanese exporters have had to grapple with not only slowing global growth, but also the appreciation of the Japanese yen, all of which has led foreign-bound shipments to tumble a whopping 46.5 percent in March from a year ago, according to figures published by the Ministry of Finance. As a result, a Bloomberg News poll of economists shows expectations for GDP to fall 4.3 percent in Q1, with the annualized rate forecasted to plummet by a record 15.9 percent.

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Written by: Terri Belkas, Currency Strategist for