Daily Report: Euro Strengthens Mildly as Markets Await Trichet's "Vigilance" as July Hike Signal

Euro recovers mildly against dollar as markets are awaiting today's ECB rate decision and press conference. It's widely expected that ECB will keep rates unchanged at 1.25% but more importantly, Trichet is expected to use the words "strong vigilance" to signal a rate hike in July. Recent weak patch of data, including the unexpected moderation in inflation raised a little bit of doubt on ECB's rate path. But with CPI staying high above ECB's target at 2.7% yoy, the gradual tightening is still expected to continue. Another focus of the meeting is the new set of staff projections on outlook. We expect upward revisions on both growth and inflation forecasts. Confirmation of a July hike, as well as strong growth and inflation projections, will push EUR/USD through this week's high of 1.4695 towards 1.5 psychological level. BoE will also announce rate decision today but will likely be a non-event.

Regarding the Greece situation, French Finance Minister Lagarde, a candidate for IMF managing director, expressed her opposition to involuntary restructuring as part of Greek debt solution. ECB has already expressed its opposition to anything beyond a voluntary rollover of debt. However, Germany Finance MInister Schaeuble has be clear that he would request the agreement of June 20 meeting must include a "clear mandate" to "initiate the process of involving holders of Greek bonds." On the other hand, German Chancellor Merkel has got backing from her coalition on a second bailout for Greece after a closed door meeting. Greece situation will be debated in the Bundestag today and a non-binding vote is expected tomorrow.

New Zealand dollar was mildly firmer after RBNZ left rates unchanged at 2.50% but said that the Official Cash Rate will be increased gradually over the next two years to offset rising underlying inflation as GDP growth picks up. The timing of rate hike, though, will be dependent on the pace of recovery. The bank noted in the statement that economic outlook has improved since publication of March statement. "Negative confidence effect" of the Christchurch earthquake has been "limited" in other parts of the country. Signs of recovery have "continued" and reconstruction in Canterbury will add 2% to GDP growth over 2012. Nevertheless, household spending will grow "only modestly" and activities will be dampened by fiscal consolidation. Strength of NZD will also negatively affect tradable sectors. "Underlying inflation remains constrained" so far.

Australian dollar weakened in Asian markets today after disappointing job data which showed merely 7.8k job growth in May comparing to expectation of 25.6k. Unemployment rate was unchanged at 4.9%. Japan Q1 GDP was revised down to -0.9% qoq while GDP deflator was unrevised at -1.9%. Japan household confidence improved to 34.2 in May. UK trade balance, Canadian housing price index, trade balance and US jobless claims, trade balance, wholesale inventories will be released today.

Dollar index formed a temporary low at 73.51 earlier this week and turned sideway. Some more consolidations could be seen but after all, we'll stay near term bearish as long as 74.94 minor resistance holds. Current view is that recovery from 72.70 has completed at 76.37 already and fall from 76.37 is resuming the longer term down trend from 88.70. Below 73.51 will retest 72.70 first. Break will confirm this bearish case and target 61.8% projection of 81.31 to 72.70 from 76.37 at 71.04, which is close to 70.70 all time low.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 115.90; (P) 116.87; (R1) 117.46;

EUR/JPY recovers mildly today but remains bounded in tight range of 115.76/117.88 so far. Intraday bias remains neutral and more sideway consolidations could still be seen. On the upside, above 117.88 will bring another rise towards near term falling trend line resistance (now at 118.37). Sustained trading above there will pave the way to 121.82 resistance. On the downside, below 115.76 minor support will flip bias back to the downside for 113.39 support instead.

In the bigger picture, the main question is whether EUR/JPY's down trend from 2008 high of 169.96 has completed at 105.42. We'll stay neutral for the moment. On the upside, above 123.31 resistance will revive the case of medium term reversal and should pave the way for 139.21 resistance for confirmation. On downside, however, break of 113.39 support will in turn favor the case for a new low below 105.42 before the trend reverses.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
1:30	AUD	Home Loans Apr	4.80%	2.30%	-1.50%	-1.10%
5:00	JPY	Eco Watchers Survey: Current May	36	33	28.3
5:45	CHF	Unemployment Rate May	3.00%	3.00%	3.10%
6:00	EUR	German Trade Balance (EUR) Apr	12.0B	14.0B	15.2B	15.1B
9:00	EUR	Eurozone GDP Q/Q Q1		0.80%	0.80%
9:00	EUR	Eurozone GDP Y/Y Q1		2.50%	2.50%
10:00	EUR	German Industrial Production M/M Apr		0.20%	0.70%
12:15	CAD	Housing Starts May		185.0K	179.0K
14:30	USD	Crude Oil Inventories			2.9M
18:00	USD	Fed Beige Book
21:00	NZD	RBNZ Rate Decision		2.50%	2.50%