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• British Pound Plunges as UK Industrial Output Unexpectedly Contracts
• Swiss Franc Remains Range-Bound vs. Euro, SNB Intervention Risk Looms
• Australian Dollar Down with Carry Trades, RBA Signals Potential for Further Rate Cuts
• Canadian Dollar Drops Despite Jump in Canadian Ivey PMI, Building Permits



US Dollar, Japanese Yen Surge as DJIA, S&P 500 Tumble to Key Levels - G8 Summit Adds to Event Risk

The US dollar and Japanese yen both saw extremely choppy price action, and ultimately ended the day up against the majors as risk aversion drove FX carry trades and equities lower. However, where the S&P 500 and DJIA closed leave very mixed signals, as daily charts of both indices show head and shoulders patterns, but the former ended the day just above its neckline of 880, while the latter made a bearish break below its neckline at 8260. This leaves Wednesday's price action as being quite critical for the outlook for equities and FX carry trade alike. Personal suspicions sit on the bearish side of the fence, as global economic outlooks may be a bit too rosy for reality, which could ultimately disappointing corporate earnings down the road (and thus, declines in equities).

While there are no major US economic indicators due out on Wednesday, there will be lingering event risk stemming for the upcoming Group of Eight (G8) meeting from July 8 - July 10. According to a program outline on the G8 Summit site, participating government leaders will discuss the world economy, global issues, international issues, development policies, futures sources of growth, and the impact of the crisis on Africa. In between all of these meetings, there will also be a variety of press conferences, leaving ample room open for market-moving commentary.

Related Articles: US Dollar Weekly Trading Forecast, DJIA Head and Shoulders Pattern Adds to Bearish Potential

British Pound Plunges as UK Industrial Output Unexpectedly Contracts

The British pound remained under heavy pressure throughout the day, as UK data was disappointing. The UK Office for National Statistics said that industrial output tumbled by 0.6 percent in May, missing forecasts for a 0.2 percent increase. Indeed, as mentioned yesterday, other measures of activity in the sector such as manufacturing PMI have risen steadily between March and June, but since the index has held below 50 since May 2008, the results simply suggest that the contraction in the sector has slowed, rather than abated completely. All told, the surprise drop in output has only added to speculation that the Bank of England may announce an expansion of their quantitative easing program on Thursday.

Related Article: British Pound Weekly Trading Forecast

Swiss Franc Remains Range-Bound vs. Euro, SNB Intervention Risk Looms

The Swiss franc rose against the euro once again on Tuesday, keeping EUR/CHF within an intraday falling channel formation, with support now at 1.5145 and resistance at 1.5225. This pair is important to watch as the Swiss National Bank (SNB) has cited the appreciation of the Swiss franc against the euro as a risk for deflation, and has physically intervened in the currency markets within the past two weeks. Also, last Thursday, SNB directorate member Thomas Jordan said that they continue to consider interventions to prevent an excessive rise in the Swiss franc. As a result, traders should beware that the further EUR/CHF falls, the greater the potential for intervention grows.

Related Articles: Swiss Franc Weekly Trading Forecast, Euro Weekly Trading Forecast

Australian Dollar Down with Carry Trades, RBA Signals Potential for Further Rate Cuts

The Australian dollar saw very choppy price action in Asian trading after the Reserve Bank of Australia left rates unchanged at 3.00 percent, as expected, but issued mixed commentary in their policy statement. On one hand, the RBA said reiterated that the global economy is stabilizing and said that downside risks to the outlook have diminished, but at the same time, they said that the outlook for inflation allows some scope for further easing of monetary policy. By the end of the US trading session, the Australian dollar was down sharply, but this had more to do with the broad decline in FX carry trades as risk aversion arose yet again.

Related Article: Australian Dollar Weekly Trading Forecast

Canadian Dollar Drops Despite Jump in Canadian Ivey PMI, Building Permits

Canadian economic data was surprisingly strong, but Canadian dollar gains were only short-lived as demand for safe-havens like the US dollar and Japanese yen overrode any fundamental forces. First, Statistics Canada said that building permits jumped 14.8 percent in May, which was much larger than the expectations for a 0.8 percent increase. That said, this indicator is extremely volatile, limiting its use as a clear sign of Canadian housing market conditions. Next, the Ivey Purchasing Managers' Index (PMI) rocketed up to a nine-month high of 58.2 in June from 48.4, as a breakdown of the report showed that employment activity remained neutral for the second straight month, inventories contracted further, supplier deliveries surged, and prices jumped.

Related Article: Canadian Dollar Weekly Trading Forecast

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