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• US Dollar, Japanese Yen Pull Back as Volatility Hits 9-Month Low
• Euro Tests 1.41 as Euro-zone Business, Consumer Confidence Improves
• British Pound Edges Higher as UK Mortgage Lending Rises
• New Zealand Dollar Dominates Amidst Risk Appetite, Surge in Export Demand

US Dollar, Japanese Yen Pull Back as Volatility Hits 9-Month Low
The US dollar and Japanese yen started the week off with losses as a rally in European and US equities and a drop in the CBOE's VIX volatility index to the lowest since mid-September all indicated that investor sentiment was improving. Meanwhile, Treasuries gained, driving 10-year yields to one-month lows, after the People's Bank of China Governor Zhou Xiaochuan said that his nation's forex reserve policy is always quite stable and there are not any sudden changes, helping to quell concerns that there will not be enough foreign demand for US Treasuries down the road to finance the country's massive budget deficit.

On Tuesday at 10:00 ET, the Conference Board's consumer confidence index for the month of June is forecasted to continue rising from its record low of 25.3 reached in February up to a 9-month high of 55.3. With record keeping having begun in 1967, the plunge in sentiment from the 2007 highs of 111.90 makes the extent of the recession especially clear. Nevertheless, a surprisingly strong result could provide a boost to risky assets, as the move would indicate that sentiment may have bottomed out. However, if consumer confidence goes little changed or rises right in line with expectations, the news is unlikely to evoke much of a reaction from the markets.

Related Article: US Dollar Weekly Trading Forecast

Euro Tests 1.41 as Euro-zone Business, Consumer Confidence Improves
The euro moved higher for a test of 1.41 against the US dollar on Monday after the European Commission released a variety of sentiment indicators, many of which signaled the highest levels of optimism in the Euro-zone in seven months during June. Indeed, the index measuring economic sentiment rose to 73.3 from 70.2, while the business confidence index crept up to -32 from -33 due to improvements in future production, past production, employment, and selling prices. Likewise, the consumer confidence index increased to -25 from -28. Overall, the mild improvements suggest that the worst might be over for the region, but with many of the indices still deeply negative, they also indicate that recovery may be very slow to come to fruition.

On Tuesday morning, the Bundesbank is expected to report that the German unemployment change for the month of June rose for the eighth straight month by 45,000, which could push the unemployment rate up to 8.3 percent from 8.2 percent. Later on, Eurostat will release their estimate of Euro-zone CPI for the month of June, and the results could be troubling as CPI may hit a fresh record low of -0.2 percent from 0.0 percent. While the European Central Bank has said in the past that they expect inflation growth to fall negative mid-year due to weaker commodity prices, they do not believe that this constitutes a deflation risk. Nevertheless, sharper than anticipated contractions could stoke fears of such a phenomenon in the FX markets and send the euro tumbling.

Related Article: Euro Weekly Trading Forecast

British Pound Edges Higher as UK Mortgage Lending Rises
The Bank of England's measure of mortgage lending for the month of May rose much less than expected to 43,414 approvals from 43,191, while net mortgage lending rose by 324 million pounds, down from a 908 million pound increase in April. The news only highlights the mixed nature of the data we've seen regarding the UK housing sector, as home prices have shown slight signs of stabilizing, but at the same time, some UK mortgage lenders have said that they would be raising fixed-rate mortgage rates, which could put a dent in potential demand for credit later on.

On Tuesday, the UK's Office for National Statistics will release their final readings of GDP for the first quarter, and the quarterly result is expected to be revised down to -2.1 percent, the lowest since Q3 1979, from -1.9 percent. Perhaps even worse, annualized GDP could be revised down to -4.3 percent, the lowest since records began in 1956, from -4.1 percent. Revisions in line with, or worse than projections should weigh on the British pound as the news would indicate that GDP sits toward the lower end of the Bank of England's past projections, and may suggest that the central bank's forecasts were perhaps somewhat optimistic.

Related Article: British Pound Weekly Trading Forecast

New Zealand Dollar Dominates Amidst Risk Appetite, Surge in Export Demand
The New Zealand dollar was the strongest of the majors on Monday, due primarily to broad demand for FX carry trades, but also as New Zealand data suggested that a surprise increase in foreign demand could help lift the nation out of recession later in the year. Statistics New Zealand said that the nation's trade balance widened to NZ$858 million in May, thanks to a NZ$3.96 billion surge in exports and a smaller than expected increase in imports of NZ$3.10 billion. All told, the data indicates that the Reserve Bank of New Zealand may avoid cutting rates any further this year, despite the surprisingly steep 1 percent contraction in GDP during Q1.

Related Article: New Zealand Dollar Weekly Trading Forecast

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com