Key Points
EUR-USD remains close to yesterday's lows.
US data continues to offer the USD some encouragement.
82.40-65 on the USD index could carry significance for general USD sentiment.
Selective commodity price weakness weighing on AUD-JPY.
UK and Canadian retail sales, US Michigan sentiment feature today.

Market Outlook
EUR-USD has remained subdued overnight, failing to bounce too far from the lower levels established after yesterday's stronger than expected initial claims data. The market will continue to view such weekly data with some suspicion, but the longer this improvement is sustained the more credible it will become. The 4-week average on initial claims is now at its lowest since April last year, while next week's data on total claims will include the 12th day of the month, which is survey week for payrolls. Any strength or weakness in that number will affect sentiment about the employment report.

The Philly Fed index was pretty much in line with market expectations, although it is consistent with the notion of some stabilisation in the manufacturing sector. Furthermore, some of the key components of the survey were encouraging, with orders the highest since October and employment the highest since April last year.

Such developments will continue to offer support for the USD and any break below 1.3440-60 on EUR-USD would trigger another round of position adjustment in the USD's favour. 1.3340 would be the immediate target on such a break. 1.3500- 05 needs to be cleared today to alleviate immediate downside risk and the tone of the Michigan sentiment number will be significant. Any strength in the data would reinforce the risk in favour of a break lower in EUR-USD. 82.40-66 on the USD index (currently 82.33) will also be significant for broad USD sentiment. 82.40 stopped the USD index yesterday and also did so on May 10, while 82.65 marks previous lows from March, which broke in April.

There was a much weaker than expected tertiary activity index out of Japan (-2.2% for March), more than offsetting the 1% rise seen in February. The 3-mth average still looks fairly good (see chart) so it would be wrong to get too pessimistic just yet. The JPY is steadier overnight, with Asian equity markets slightly softer and the downturn in some key commodities (copper especially) also raising some fears about global market stability. Equity markets in Europe and the US will need to follow suit to boost the JPY further. USD-JPY should retain good support, but EUR-JPY could correct a little if 163.35 breaks. Global market instability led by commodities would not be good for AUD-JPY and this has remained soft overnight. Below 99.40 on AUD-JPY would suggest some corrective risk lower in the short-term (98.50-75).

Today's G8 meeting is unlikely to make any formal reference to FX, as a German official noted earlier in the week that such matters would not be on the agenda. However, European officials may refer people back to what was said at previous meetings about the JPY eventually reflecting improved Japanese fundamentals.

Day Ahead
UK - retail sales data for April is due and the recent CBI survey suggested a strong spending performance during the month, helped by the warm weather. EUR-GBP looks fairly steady, with scope down to 0.6815-20 on any data strength and room up to 0.6850-60 on any weakness.

Canada - retail sales for March is due today and spending has been reasonably solid in recent months once autos are excluded. Wholesale sales data for March released yesterday were much stronger than expected at 1.9%, leaving some upside risk to today's retail numbers. USD-CAD support is at last year's low of 1.0932 (also the lowest since 1977). While some commodities are weakening at the present time, oil is strengthening and this is offering support for the CAD.

US - the University of Michigan measure of national consumer sentiment has been weaker over the past couple of months, but remains above the lows seen last year. Some stabilisation is required to maintain the impression that consumer resilience is being sustained.

Diary
Data/event BST Consensus*
 
IT Ind orders (Mar) m/m 09.00 2.6%
GB Retail sales (Apr) m/m 09.30 0.6%
CA Retail sales (Mar) m/m 13.30 0.6%
CA Retail sales ex-autos (Mar) m/m 13.30 1.1%
US Michigan sentiment (May, prel) 15.00 86.2
Latest data Actual Consensus*
JP Tertiary index (Mar) m/m -2.2% -0.7%
DE PPI (Apr) y/y 1.6% 2.0%
* Consensus unless stated