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Forex outlook:
The U.S currency ended the week as he strengthens to a more than tow month high Vs. the Euro. Strong growth expectations for the second half got some confirmation from a narrowing deficit in the U.S trade balance and signaled a rising export trend. Many economists including the FED Chairman Ben Bernanke are basing their growth estimates on the record high export demand. The continuing raise in the stock market is giving support to the dollar but is also supported by a relatively weak U.S currency.
The ten years U.S yields rose to 5.24% before settling around 5.12% and increased demand for the dollar.
The pound fell versus the dollar for a second week after the Bank of England kept interest rates unchanged at its monthly meeting. ``The BOE met market expectations,'' said Tom Vosa, head of market economics at National Australia Bank in London, and a former economist at the central bank. ``Although a rise in July is possible, we think members might opt to wait until August.'' Further declines for the pound were limited after data yesterday showed industrial and manufacturing production in Europe's second-largest economy increased for a second month in April. The strong data has driven the sterling higher against the Japanese Yen, Euro and the Swiss Franc.
The Yen managed to recover toward the end of the week after reaching records high against the Euro and weakening above 122.00 vs. the dollar.
The rally in the Dow exacerbated the rise in carry trades but those currency pairs already began to trend higher before the US stock market even opened. The initial sell-off in the Japanese Yen was triggered by the nonchalant attitude of the Ministry of Finance towards the carry trade. MoF Watanabe said that there is “no immediate risks of carry trade unwind” and that any unwind would be “small compared to the entire FX market.” The Japanese government is clearly not concerned about the Japanese Yen strengthening. In fact, they probably will welcome it since it automatically tightens the economy and therefore reduces the need for a premature interest rate hike.
The investors will eye the US retail sales, producer prices and the Fed Beige Book report due to be release further in the week. The UK has one of the busiest calendars next week with producer prices, consumer prices, employment and retail sales due for release, so big moves are possible in the British pound. Japan Second release of GDP, CGPI, consumer confidence, the current account, and industrial production are due for release. The Bank of Japan will be meeting to decide on monetary policy, but interest rates are not expected to be changed. The rate in Switzerland is expected to raise in 0.25 basis point to be set at 2.5%.
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