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EURUSD rose +200 pips 3 of the last 2 Fridays on what fundamentals described the reason to be German/French support for a voluntary rollover of Greek debt rather than a full-scale debt exchange with extended maturities. Subscribers to our Thursday Premium trades saw our euro bullish call titled "Confirming the Euro Bounce" before these news were released. Our Thursday argument for going long EURUSD was based on the following 2 drivers:

1) Bullish Hammer Candle (See chart from Thursdays piece)

2) EURUSD held above the 100 DMA, which we said would translate into 1.4250 on Friday, followed by 1.4330 next week.

Some people asked why we called for HIGHER EURO & LOWER METALS on Thursday. All three trades were hit w/ limits executed.

Our Friday Premium piece shows a RARE EURUSD 1-month VOLATILITY CHART and what it means for the spot market. Premium subscribers click here for direct access: http://ashraflaidi.com/products/sub01/access/?a=442

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Title of today's Premium Piece: "Euro Confirms, 1 Month Volatility Look"

Ashraf

Market sentiment sees a complete turnaround. USD sold across the board on the back of Merkel and Sarkozy meeting in Berlin. UoM Consumer Sentiment is next. See in our Thursday Premium piece how and why we called for longs in EURUSD, S&P500 but intermediate shorts in gold & silver.

Risk off sentiment continued in Asia which pushed EURUSD back towards 4130 level. Once the London session started, there was a 180 degrees change. USD is weaker across the board on the back of chancellor Merkel and president Sarkozy meeting in Berlin.

Both leaders agreed that they have the same position on Greece and that "private sector involvement in Greece must be voluntary. The German government wants private bondholders to share a part of the losses but it faced a strong opposition. While they both agree that a solution on the Greek issue is necessary and that there is a need to preserve the stability of the euro, not many concrete details have been revealed. Exactly how private entities will be made to voluntarily roll over their bond positions remains to be seen.

Chinese foreign minister also helped to improve the sentiment when he was quoted saying that China has been helping by buying Euro debt and that Europe overcoming its debt crisis is vitally important to China.

The FX market focused on Merkel/Sarkozy meeting and ignored the widening of EZ deficit that reached 2.9B in April worse than 2.2B in March.

New York session news schedule is light today. At 8:30 am ET Canadian Wholesale Sales for April are expected to drop to -0.3% from previous 0.1% followed at 9:55 am ET by US preliminary University of Michigan Consumer Sentiment index for June expected to improve slightly to 74.4 from previous 74.3. This index has experienced three months of straight gains but it is difficult to imagine consumers sentiment to continue to improve while fundamentals deteriorate.

The last news of the week is due at 10:00 am ET. The Leading Indicators index for May is expected to improve to 0.3% from previous -0.3%. Given that markets will still be absorbing the result of Consumer Sentiment released just five minutes earlier, the impact of this index is likely to be limited.

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Greece set to dominate as Merkel and Sarkozy meet in Berlin, Greek cabinet reshuffle, Bank of Japan minutes.

Yesterdays change of heart by the IMF to allow Greece to access the next instalment of its aid package for July without the necessary agreements on debt repayments, has seen the pressure on the euro diminish slightly, however peripheral bond yields continue to trade at highly elevated levels with Spanish 10 year yields at eleven year highs and Greece two year yields touching 30%.

Markets will be hoping that todays meeting in Berlin between French President Nicolas Sarkozy and Angela Merkel, the German Chancellor will result in some form of resolution to the turmoil that has engulfed the markets this week.

Given recent experience it is likely that the markets could well be disappointed given that the Germans want some form of private bond holder involvement in a resolution to the crisis and the ECB and France do not. It is more likely that the leaders will attempt to buy more time until next weeks EU summit on 23/24th June, and the 11th July when some form of agreement is expected to be reached on a second bail-out package.

Later this morning Greek Prime Minister Papandreou will seek to restructure his cabinet and then try and then gains support for a confidence vote for the new 78bn austerity budget. The budget needs to pass for the Greeks to gain access to the latest tranche of IMF funds.

In economic data due out later Eurozone trade balance data for April is expected to show a deficit of 1.9bn, down from a surplus in March 2.8bn.

Last night's Bank of Japan minutes showed that some policymakers were in favour of further easing measures due to doubts about the ability of the economy to recover from the effects of the earthquake. In the short term the Bank cited recent improvements in household and business sentiment as evidence of a gradual recovery and elected to adopt a wait and see approach.

With options expiration also due today, markets expect added choppiness in equity markets.

In the US investors will be hoping that University of Michigan confidence data for June comes out better than yesterdays Bloomberg consumer comfort data, which fell to its lowest level for two years.

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Stocks made small gains but the pattern of forex trading was risk averse as the low yields led and commodity currencies (along with GBP) lagged. US Philly Fed survey fell below zero. The situation in Greece calmed to a simmer from a boil after PM Papandreou appeared to squash an uprising within his Socialist party as he forced two Parliamentarians to resign.

PM Papandreou also pledged to continue to lead his party. EU leaders ensured Greece will remain funded until September. The euro made slight gains against USD after falling more than 2.5 cents yesterday.

US economic data continues to point to high unemployment and a slowdown in manufacturing. The 'H2 Rebound' is starting to look like it could morph into a year of staggering at 1-2% growth. Nothing yet points to a double dip. The Philly Fed fell to -7.7 compared to the +7 consensus. As Ashraf mentioned via Twitter, this creates a distinct risk of a sub-50 ISM manufacturing reading. Initial jobless claims were better than expected at 414K vs the 420K consensus but remain above 400K for the 10th consecutive week.

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Another story that weighed on market sentiment was a report that Basel banking rules may force large lenders to hold an addition 3.5 pp capital buffer. The proposal suggests a sliding buffer scale based on bank size and systemic importance. In theory, this is a great way to improve financial stability without forcing banks to break up. It will also foster a more diversified financial system by giving smaller lenders a leg up. Although the knee-jerk reaction has been negative we expect a change of heart from the market. There was no doubt that something was going to be done internationally on 'too big to fail' so some measure of this had to be priced in. There was even talk from the Fed's Tarullo of a 7 pp buffer. At the same time, this does nothing to necessarily drive up the costs of businesses dealing with banks as they should have low-cost opportunities with smaller lenders and that will force larger lenders into greater competition.

EUR continues lower amid unceasing Greek worries. GBP punished after weak retail sales data. Market turns to US jobless claims, housing data and Philly Fed index.

London sees higher USD, except against JPY and CHF. The financial and political situation in Greece is worsening everyday and any credible solution seems nowhere to be found. News about Greek unemployment rate for Q1 shooting up to 15.9% from 14.2% in Q4 did not help. EZ employment rate for Q1 was unchanged; market expected an improvement to 0.2%. EZ annual CPI rate came in line with expectation at 2.7%.

UK retail sales disappointed with a 1.4% decline, vs expected -0.5%. This is the lowest reading since February 2010. GBP has lost about 70 points on the back of the news release.

Todays New York session starts at 8:30 am ET with a number of data releases. US May Building Permits are expected to decrease slightly to 550K from 563K and May Housing Starts are expected to increase to 545K from previous 523K. In light of the recent flood of disappointing economic figures, it is hard to imagine a positive surprise.

Current Account deficit in Q1 is expected to widen to 126B from previous 113B and Unemployment Claims are still stubbornly holding well above the 400K mark. This week Claims are expected at 421K.

At 10:00 am ET, the Philly Fed index that measures manufacturing activity in Philadelphia is expected to increase slightly in June from previous 3.9 to 7.1. Yesterday, the Empire State Manufacturing index came out significantly below expectation so disappointing print is somewhat likely. The severity of the decline is highlighted by the fact that over the past six months, Philly Fed index stayed around 20, in March it spiked to 43.4 and in May it dropped to 3.9. Manufacturing and other indices from many countries have shown decreasing values lately as a significant portion of economies around the world are slowing down.

UK retail sales expected to plunge, bailout deadlock puts euro in a spin, Eurozone CPI and India rate decision awaited

After yesterdays mixed employment data and surprising rise in April Nationwide consumer confidence, sterling bulls will be hoping for more good cheer today with the release of May retail sales figures after the surprise 1% rise that we saw in April, which were no doubt boosted by the late Easter, the un-seasonally warm weather and the Royal Wedding. Analyst expectations are for May sales to slide 0.6% on the perception that a lot of summer buying may have been brought forward.

In any event given that expectations are so low even an upside surprise might not see too much of a reaction given the trade weighted gains weve seen since the beginning of this week. Key level on cable remains around the 1.6000 area, the 200 day MA

The political deadlock in Europe surrounding a possible solution to the Greece problem has continued to roil markets, sending the single currency to its sharpest fall in six weeks, as the Greek Prime Minister lost parliamentary support for further austerity measures against a back drop of rioting and protest in the Greek capital. Papandreou also pledged to try and form a new government which could complicate matters with respect to a speedy resolution to the crisis. Reports that ECBs Wellink stated that European aid may well have to be doubled to 1,500bn has also undermined the single currency.

As the crisis in Greece rumbles on there is the small matter of Eurozone CPI for May which is expected to slip back to 2.7% from Aprils 2.8%, while core CPI is expected to remain unchanged at 1.6%. There is little likelihood that it will make much difference to the likely decision by the ECB to raise interest rates again at the next meeting in July.

All the while the Swiss franc continues to gain on safe haven flows making new all-time highs against the single currency.

In Asia markets stocks fell back as the crisis in Europe rumbled on and eyes will be on the Reserve Bank of India which is expected to raise interest rates after this weeks inflation figures showed prices increased by over 9%. This could well be a precursor to further tightening measures across emerging markets and Asia and in particular China, who could well follow the reserve requirements hike this week with another 0.25% hike in deposit rates this week.

In the US weekly jobless claims, housing starts and Philadelphia Fed survey are due out, and given yesterdays disappointing NY Empire data there is concern that Philly Fed could similarly disappoint.

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A wave of risk aversion smashed over markets Wednesday, driving the euro more than 250 pips lower and hammering stocks. Political disarray in Greece and continuing weak economic signals triggered the move. New Zealand's business PMI is the highlight of the Asia-Pacific session.

Intensifying protests in Greece emboldened protestors who attempted to storm Parliament. At the same time, opposition leaders are attempting to force out PM Papandreou. A cabinet reshuffling has been annouced and some reports suggest Papandreou has offered to step down as long as new leaders respect the terms of the bailout package. The uncertainty is weighing on negotiations with EU leaders and market participants are now questioning whether the bailout (which was assumed to be completed two weeks ago) will go forward.

Other factors that weighed on sentiment included: 1) A -7.8 reading in the Empire Fed compared to the +12 expected. 2) US industrial production expanded 0.1% vs the +0.2% expected. Metrics on rail and truck transportation also flashed further contractionary signals. 3) US core CPI rose 0.3% vs 0.2% expected. Higher inflation gives the Fed less flexibility to stimulate the economy. 4) Irish leaders said they want senior bondholders to take a haircut on the bonds of bailed out banks.

The USD was the chief beneficiary of the risk aversion and the DXY rose the most in 8 months. The S&P500 fell 1.7% to 1265 and oil closed below $95. Gold and silver were among the small number of commodities that made gains. Cable was the second-worst performer due to European proximity and dovish comments from King. Although he asserted that rates will eventually need to rise, he said low M4 is a negative for inflation and that lending spreads must tighten before rates rise.

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EURUSD breaks back below 1.43 on prolonged Greek debt negotiation deadlock.

Our latest premium piece identifies the trading dynamics over the next 24-48 hours over EURUSD and EURJPY.

The Euro is bearing most of brunt of the latest deterioration in risk appetite. We are seeing US Crude oil able to hold above the 97 support so far, therefore we need to assess whether this Euro deterioration will spill over on to risk assets.

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London session sees USD stronger across the board. GBP drops after disappointing labor market data. EUR ignores decent Ezone industrial production amid ongoing Greek debt uncertainty. US Consumer inflation industrial production is next.

GBP drops after claimant count Change showed the largest increase since February 2010 standing at 19.7K vs. 7.1K expected. Unemployment rate stayed at 7.7% but the Average Earnings Index decreased from 2.4% to 1.8%. GBPUSD is currently about 120 points below London open.

EZ Industrial Production for April improved to 0.2% from previous unchanged reading. Market expected a contraction by 0.1%. The fact that the Euro ignored this news and continued lower, combined with ever increasing spread between German and EZ periphery bonds shows that the pressure on the Euro is building. The meeting of EZ finance ministers who failed to achieve anything significant did not inspire much confidence either.

New York session kicks off at 8:30 am ET with US May CPI expected to decrease from 0.4% to 0.2% which would be the lowest reading since 12/2010. Core CPI is expected to grow at steady pace at 0.2%. The annual CPI is expected to increase from 3.2% to 3.4%. As QE2 comes to an end, the various inflation measures become even more important because the inflation level may determine a course of future FED action.

TIC data has been declining for five straight months showing less interest that foreigners have in holding longer term US securities. On a net basis, capital flow is expected to show an improvement to 45.3B from previous weak print of 24B. TIC data is due at 9:00 am ET.

9:15 am ET May Industrial Production expected to increase to 0.2% after unchanged reading last month.

Low volatility that is often seen during New York afternoon could be stirred up at 3:45 pm ET when BoE's Mervyn King gives speech in London.

Sterling in focus this morning as unemployment data are awaited, Greece concerns still drag as Moodys puts French banks on review, Eurozone industrial production expected to remain weak.

With inflation in the UK remaining firmly entrenched as per yesterdays CPI numbers and likely to rise in the coming months on the back of higher energy costs, businesses in the UK will find margins continuing to come under pressure as consumers batten down the hatches. This could well see the unemployment numbers struggle to come down especially if business becomes reluctant to hire. Todays unemployment data for May are expected to show an improvement in jobless claims to a rise of 6.5k from Aprils 12.4k rise while the ILO unemployment rate for the three months to April is expected to remain constant at 7.7%.

Average earnings data for the 3 months to April will also be of particular interest with respect to any rise from the 2.1% level of the previous three months. The Bank of England will be looking for evidence of any type of build-up of wage price inflation which could well dictate when the committee might start to raise interest rates. Any significant rise in this headline figure could suggest that wages are starting to rise in response to the recent high levels of inflation and prompt the beginning of a broader shift towards a rise in rates.

Cable faces resistance near 1.6450s and EURGBP at 0.8850.

Eurozone industrial production has for quite some time now been slipping back, and the expectation for April is no different with expectations of a month on month decline of 0.2%, suggesting that the problems within the Eurozone with respect to sovereign debt are now provoking a slow down in the growth picture.

Yesterday the OECDs leading indicators index suggested that major European economies were starting to see a significant slowdown in growth with the sharpest falls in Italy and France, the two largest economies after Germany.

Euro holds up despite all of the above, but until such time as policymakers are able to come up with a solution that satisfies both Germany and the ECB, no small task, then we could well find that further upside in the euro could be subject to sharp pullbacks. This failure to agree has prompted ratings agency Moodys to put Frances top banks on review for a downgrade over Greece this morning.

Positive sentiment snapped back after better than expected US retail sales on Tuesday. The commodity currencies surged while CHF and JPY lagged in a classic risk on pattern. New Zealand Q1 retail sales rose by the highest in 4 years.

US retail sales declined 0.2% in May compared to the -0.5% expected. Automotive sales slumped badly but analysts say they are confident this is due to Japanese supply disruptions in part because of positive signals in the used car market. Sales excluding autos and gas advanced 0.3% compared to the 0.2% expected. With gas prices 10% lower than the peak, sales are expected to accelerate and that helped boost sentiment.

The best performer was AUD followed by CAD and NZD. Oil climbed $2 and gold $10. The S&P 500 gained 1.3% but was higher by more than 2% heading into the final hour when a round of profit taking hit. That move weighed on EUR/USD, pulling it to 1.4440 from 1.4997 and other risk trades followed a similar pattern.

Asia-Pacific Preview

NZ March retail sales rose 2% in the March quarter, the biggest increase in four years. Core retail sales, (ex auto-related industries, rose 0.9%), NZDUSD has not reacted on the news as risk assets have been unable to extend the US rally into Asia.

Meanwhile in Tokyo, Japan's Finance Minister was cited by news wires that currencies should reflect economic fundamentals and that he is closely watching FX markets. Fading the gains towards 81-82 is expected to ensue even as intervention threats beckon. Renewed break below 80 is viable by early July before the next tankan survey.

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The broad rebound in risk appetite (equities, risk currencies & commodities at the expense of USD) is unleashing all sorts of fundamental explanations by pundits as if something significant has changed. China's latest data was deemed either too cool to threaten the global economy nor too hot to threaten the need for aggressive tightening. Just as the Fed easing has lost its efficacy, so did Chinese tightening (unless of course it is accompanied by actual rate hikes). Neither the consistently poor array of US economic data has abated, nor Germanys insistence on private investors sharing in the burden of Eurozone debt has diminished. Adding to the fray, (on the USD side) is the beginning of negotiations between US VP Biden and Republicans over the debt ceiling deadline on Aug 2. We have said time and again that the US raising its debt ceiling every year is akin to getting a bailout from Asia. Add to it the fact that the Fed will be obliged to maintain liquidity despite the official end of QE2 later this month and you get a convincing selling of USD bounces. EUR shows more action when being sold against CHF and JPY than against USD. Fridays EURUSD close below the 55 dma was...

Fridays EURUSD close below the 55 dma was important, but quickly ensued into a rebound the following Monday. More significantly, Friday's close remained ABOVE the lows of May 31-June 2 & above the highs of May 13, 19 & 20, translating into a bullish translation of previous resistance becoming key support. As for the US CRUDE chart, THUSRDAY's PREMIUM OIL CHARTS REMAIN VALID as shown here: http://tinyurl.com/ 626nona with the key support continuing to hold.

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Ashraf Laidi

Markets are yet again trading within a narrow range, near their London open levels. UK consumer inflation data came as expected. Market turns to US Retail Sales and PPI.

GBP is little changed after May CPI came out in line with expectations at 0.2% m/m and 4.5% y/y. It may be a bit premature but inflation seems to be leveling off and over the past four months prices have been stable. Monthly core CPI came out unchanged and annual core CPI was slightly lower at 3.3% vs. previous 3.7%.

The deterioration of US data is set to continue at 8:30 ET when US Advanced Retail Sales are due. They are expected to contract by 0.3% from previous growth of 0.5%. The last time Retail Sales experienced a monthly contraction was in July 2010. Core Retail Sales are expected to drop to 0.3% from previous 0.6%. Retail Sales are often used to gauge the health of the consumers. Because the US economy is reliant on a consumer spending, any contraction implies worsening data down the road.

Annual May PPI, also due at 8:30 am ET is expected to drop sharply to 0.1% from previous 0.8%. If producer prices come as expected it would be the smallest increase since August 2010.

Greek, Portuguese and Irish 10 year government bonds yields have all hit their Euro lifetime highs today. Underlying worries are ongoing and a complete risk off sentiment is only one step away. Should equities fall, USD and JPY would benefit.

Chinese inflation and retail sales rise again in May provoking further tightening concerns, BoJ leaves rates unchanged, UK CPI and RPI in focus as MPC member Weale calls for a rate rise. PBOC raised the reserve rate ratio by 50 bps to a new high of 21.5%.

The next move in central bank interest rate policy in China and the UK is the centre of attention today as the likelihood of further tightening measures in China increased in the near term, after May CPI data showed another rise in inflation from 5.3% in April to 5.5%. Chinese retail sales also showed no sign of abating, despite recent tightening steps, rising year to date from 16.5% in April to 16.6%, while growing year on year to 16.9%. Producer prices also remained high rising 6.8% against expectations of a rise of 6.5%.

With those numbers, it was no surprise from the Peoples Bank of China were to have taken further steps to tighten monetary policy further as it raised its RRR by 50 bps to 21.5%.

The Bank of Japan left interest rates at record lows as the Japanese economy continues to grapple with the after effects of the earthquake earlier this year, but the bank did announce measures to lend more, expanding its special lending facility to promote economic growth and weaken the yen.

Concerns about rising prices are not just confined to the Asian economies with UK INFLATION TAKING CENTRE STAGE later this morning with May CPI expected to remain unchanged from Aprils 4.5% level, but still well above the Bank of England's 2% target. This consistently high level of inflation prompted MPC member Martin Weale last night to suggest that interest rates may have to rise irrespective of whether the economy continues to grow, due to the risk that inflation expectations may become entrenched.

Meanwhile still rumbling away in the back ground the single currency shrugged off the decision by S&P to cut Greece three notches to worlds lowest credit rating at CCC with a negative outlook. The euro will continue to remain susceptible to further weakness as ECB officials and EU politicians continue to wrangle about how best to deal with the question of how to deal with a Greek default. Meanwhile peripheral bond yields continue to blow out with Portuguese 10 year yields hitting their highest ever post euro level, at 10.7%.

Later today. US retail sales for May could give further clues as to the health of the US consumer in the face of rising food and gasoline prices.

EUR Shrugged S&P's downgrade of Greece to CCC & closed at its 55 dma.GBP made gains throughout US trading on technical buying and a further commitment to hike rates from BOE hawk Martin Weale. The NZD continued to lag but recouped most of its post-quake losses. The. focus now shifts to the monthly data slate from China and the Bank of Japan interest rate decision.

Weale noted softer data recently but said there are significant risks in delaying interest rate hikes. He sees a substantial risk the CPI will surpass 5% this year. The bulk of the BOE remains committed to low rates and the OIS market is pricing in just 26 bps in hate hikes for the next 12 months. Kyle earlier mentioned major support in cable at 1.6175 and that area provided a springboard as the pair shot to 1.6376. The move forms a bullish reversal on the daily chart.

Overall risk sentiment was volatile and volumes were low. Stocks opened higher before falling to a three-month low and then closing fractionally higher. The euro rebounded from earlier losses despite to an S&P downgrade of Greece and closed above 1.44 after falling as low as 1.4320. Trichet boosted the currency by emphasizing that any action for Greece must not trigger a credit event. Commodities were weak with oil falling oil falling $2 to $97.30 and Gold down $5 to $1525.

Asia-Pacific Preview

The Chinese slate of economic data will be released at 0200 GMT. The main focus will be CPI but industrial production and retail sales will drive trading as well. The CPI is expected to climb to 5.5% in May from 5.3%. A report today in the China Securities Journal suggested inflation could peak at 6%. The high readings put pressure on policymakers to respond with interest rate hikes, CNY appreciation or raising bank reserve ratios all options will cool global and domestic growth. April trade figures suggested slowing imports and this could feed through to industrial production which is expected to decelerated to 13.1% y/y from 13.4% y/y. Retail sales are expected at 17.0% y/y. The overall tone of the various reports will be the main driver of trading in the day ahead. Low inflation and strong growth would benefit risk trades and commodity currencies and vice versa.

Japan will also be in focus due to the Bank of Japan rate decision. There is no set time but it is usually announced around 0300 GMT and followed by a press conference. No change from the 0.10% rate is expected. Nikkei is reporting that the BOJ may introduce a new low-interest lending program or expand on the current program. New measures could weigh on JPY and help boost broad sentiment but overall trading will likely be overshadowed by China. At 0430 GMT Japan will also release industrial production with a 1.0% rise expected.

SEASONED MARKET PARTICIPANTS may have have learned that BoJ monetary policy decisions to further ease policy have usually resulted into YEN STRENGTH and NOT yet weakness, with the interpretation that the action has been priced in the market. PROCEED CAREFULLY after the decision.

FX market continues to trade mostly within narrow ranges. The USD is on the weaker side with the exception of the NZD that collapsed a full cent after an earthquake hit New Zealands Christchurch yesterday. A high volatility is also seen in EURCHF that fell right to the psychological 1.20 level. Multiple currency pairs trade near key levels.

London is open today but the rest of the most important European financial centers are closed for holiday. The only data released during the London session was Italian Industrial Production for April that improved from 0.7% to 1.0%, well above market expectations of 0.2%.

There are no economic data releases scheduled for todays New York session. Even Trichets speech at the School of Economics in London due at 10:00 am ET is not likely to have any impact on the market. Under these circumstances, technical studies and overall market sentiment become more relevant.

Some technically significant areas to pay attention to:

EURUSD trades near 50% fib. retracement of the run from 3968 to 4695 at 4331. This support level is a significant one because it coincides with 5/20 highs and also with 6/1 lows. Euro experienced a considerable depreciation last week and waiting for signs that would confirm whether the move signaled a start of a new trend or only a liquidation of existing longs might be sensible.

GBPUSD zone between 6209 and 6165. The upward sloping trendline from 12/2010 could provide support around the 6165 area. This zone also coincides with 4/18 low. 6209 is 38.2% fib. ret.

USDCAD 9980 level. USDCAD has been trading with an upward bias. Should price break to the upside, it is likely to stall at 9980 level which is given by multiple lows/highs and also by 38.2% fib. ret. of the fall from 0852 to 9446. Risk off environment and higher lows pattern seen on the daily chart would indicate that upside break is likely.

USDCHF 8555-8565 zone. EURCHF lost almost 150 points since yesterdays open. This fall pulled USDCHF lower. If USDCHF is able to recover, zone around 8560 should provide resistance as 38.2% fib. ret. is at 8563 and 5/5 lows are at 8555.

Euro weighed by sovereign fears, sterling treads water ahead of another key week. Fridays sharp fall in the single currency could well see a period of introspection today as markets set to react over the likely direction of the next move.

With a number of Europes markets closed and little in the way of economic data to drive sentiment today, the focus will continue to be on bond yields and spread differentials as European officials remain split over the next course of action.

ECB remains opposed to any type of debt restructuring, yet steadfast in its pursuit of an interest rate policy which makes a restructuring ever more likely, after Thursdays indication that a July rate hike was on the cards.

While a Greek restructuring maybe manageable, a view espoused by Bundesbank president Jens Weidmann at the weekend, there are fears that rising Spanish and Italian borrowing costs are making life increasingly difficult. Matters are not being helped by political divisions in these countries as the appetite for fiscal austerity starts to wane in the face of the reality of it.

EURUSD key support levels remain around 1.4010 the 200 week SMA and 1.3970 the 100 day SMA. A break below 1.4250 61.8% retracement level of the move from the May lows at 1.3970 to the 1.4695 highs could well be the catalyst for a test of these key levels.

The pound managed to recoup some of Fridays losses after the shockingly poor April manufacturing and industrial production data for April. The data does need to be set in the context of the extended Easter break and Royal Wedding and this could well have been one of the reasons behind the late pullback, as markets factor in a May rebound.

The poor data resurrected the debate about further QE from the Bank of England, but this seems extremely unlikely given the current inflation level, as well as future upward pressure on prices.

The argument that inflation would begin to slip back was blown out of the water last week by the announcement by energy company Scottish Power that it would be hiking its gas prices by 19%, and electricity prices by 10% from August this year.

Tomorrows inflation data will continue to shine a light on the Bank of Englands continued refusal to hike interest rates, especially so given that price pressures seem likely to continue to grow given that other energy companies will likely follow Scottish Powers lead.

GBPUSD has key long term trend line support at 1.6175 from May 2010 lows at 1.4230.A break here would refocus attention on the major support between 1.5965 and 1.6000, the 3 month lows as well as the 200 day MA.

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A major aftershock struck Christchurch, New Zealand in early trading, sending NZD lower. Fridays CFTC data showed EUR and JPY longs building. Trading may be light on Monday with many markets closed for holidays.

The first reports from New Zealand suggested a magnitude 5.5 with minor damage and minimal damage. NZD/USD is lower by nearly 100 pips and is the largest mover by far. The Canadian dollar is the top performer.

Markets in Australia, Germany, Switzerland, France, Spain and others are closed on Monday. The UK and US are open but scheduled economic news is light.

The news so far has been negative and Asian stocks have picked up the negative tone from the US close. In China, lending data for May showed loans at 551.6 billion yuan compared to the 650 billion expected. Money supply figures were also below expectations. Japanese April machine orders fell 3.3% compared to the +1.7% expected.

CFTC data released Friday showed increasing bets against the US dollar driven by fresh long positions in EUR, JPY and AUD. The net long EUR position more than doubled to 51.8K from 22.0K. Positioning in the yen moved to +17.6K from -1.6K. Aussie longs stretched to 65.2K from 60.0K. The Canadian dollar was a loser as long positions were halved to 13.5K from 26.4K. Moves in GBP, CHF and NZD were minimal. The data covers up to the end of the day on June 7.