Key Points
Japanese data stronger than expected, aiding momentum loss on JPY crosses, but key supports remain intact.
EUR-USD retains downside risk ahead of this week's key US releases.
BoC policy announcement, US consumer confidence and house prices feature today.

Market Outlook
Japanese labour market and consumer spending data was generally stronger than expected, leaving a softer tone to the main JPY crosses overnight. The data helped to push up rate expectations a little further, with the Mar 2008 interest rate future pushing up to 1.095% (highest since mid-Jan) from 1.07% on Monday. However, there will need to be more rate hike speculation than this to stoke up interest in the FX market, where the focus remains primarily on the health of global markets and investor risk appetites. Still, momentum against the JPY is fading a little and upside appetite on JPY crosses could be put to the test once again (as it was last week) if 121.20 and 120.80 break on USD-JPY. 162.60 and 162.20 will hold similar significance on EUR-JPY.

EUR-USD remains fairly soft due to the combination of excessive long positioning (still in place) and a sense that the US economy is on the mend. It is a key week ahead in this regard as the market will be looking at Friday's manufacturing ISM and next Monday's non-manufacturing ISM to see whether this improvement in sentiment is warranted. Friday's employment report will also be significant. Risk remains down to 1.3340 ahead of Friday's data.

Day Ahead
UK - mortgage approvals from UK banks are due today and these have come off the boil a little in recent months. The market will be looking for more evidence of this in the shortterm, although more attention will be paid to the seasonally adjusted approvals data for all lenders due on Thursday.

Canada - a Bank of Canada rate hike is unlikely today but the market will be looking at the statement for clues about future policy. Most Canadian data has been strong over the past month or so apart from employment. On May 21, BoC governor Dodge noted the recent uptick in CPI and said they would be watching CPI closely over coming months, adding that they did not base policy on one number. In the April 24 post-meeting statement, they noted that CPI had been higher than expected, that the economy had been performing just above its production capacity and that the risks to their inflation projections now had a 'slight tilt to the upside'. The weakness of the US economy was noted as an offset to the strength in Canadian domestic demand. Key this week will be how this tweaked, if at all. Removing the word 'slight' from 'slight tilt to the upside' and 'just' from 'just above production capacity' would be examples of such modifications, although a more meaningful rate hike signal may be required to boost the CAD further after recent gains. Whether the CAD is mentioned in the statement will also be significant. Support on USD-CAD is at 1.0750-75, while above 1.0860-70 would leave corrective risk back up to 1.0930- 50.

US - Conference Board consumer confidence is due today and the market will be keen to see whether the main index can bounce back from the eight month low recorded last month. Higher energy prices have once again been weighing on sentiment. The jobs components of the survey will also be monitored for evidence of labour market improvement. House price data is also due and further weakness looks likely in the short-term as the market continues to adjust to the lower level of demand.

Diary
Data/event BST Consensus*
 
DE CPI (May, prel) m/m n/a 0.2%
SE Retail sales (Apr) m/m 08.30 1.2%
EU Current account (Mar) 09.00 -?5.3bn last
GB BBA mort approvals (Apr, nsa) y/y 09.30 -12% last
ZA GDP (Q1) q/q saar 10.30 4.9%
US Chain store sls (w/e May 26) w/w 12.45 -1.5% last
US Redbook sls (w/e May 26) m/m 13.55 2.2% last
CA BoC policy announcement 14.00 unch
US S&P/CS house prices (Feb) y/y 14.00 -1.0% last
US Consumer confidence (May) 15.00 105.0
US ABC consumer conf (w/e May 27) 22.00 -9 last
JP Ind prod (Apr, prel) m/m 00.50 0.5%
AU Retail trade (Apr) m/m 02.30 0.5%
Latest data Actual Consensus*
JP CSPI (Apr) y/y 1.1% 0.6%
SE Consumer confidence (May) 19.7 21.8
SE Manufacturing confidence (May) 9 11
JP Unemployment rate (Apr) 3.8% 4.0%
JP Job-to-applicants ratio (Apr) 1.05 1.03
JP Overall PCE (Apr) y/y 1.1% 0.2%
JP Retail sales (Apr) m/m 0.4% 0.3%
* Consensus unless stated, Italicised entries are Monday releases