Key Points
US data adds to positive USD arguments, leaving overall downside risk for EUR-USD.
However, EUR should retain support until the ECB meeting is out of the way - likewise for GBP ahead of MPC.
EUR-SEK approaching decent resistance area.
Quiet data schedule today.

Market Outlook
EUR-USD managed to stabilise fairly quickly after the sell-off seen following Friday's ISM release, with the prospect of Wednesday's ECB meeting the most likely supporting factor. While a 25bp rate hike is fully priced in, the market is wary of a hawkish message from Trichet and this should maintain some support for the EUR until the event is out of the way. However, it is not clear that Trichet will be keen on advancing money market hawkishness any further for the time being, so there is downside risk for EUR-USD in the second half of the week, given the improving situation in the US.

There were two themes from last week's US data. One is that it is still too early to call a bottom in the US housing market, with strength in new home sales being offset by disappointments in the existing and pending home sales releases. The other was the picture of recovery developing in the manufacturing sector. This not only related to the solid ISM number released on Friday, but also to the weak Q1 GDP number. The weakness of Q1 GDP was driven by weaker inventories, which actually lent credibility to the notion of a manufacturing rebound in Q2 (higher ISM) as inventories are rebuilt. Whether this is sustained is another matter, but the market will continue to look more favourably on the prospects for US economic activity in the short-term. The status of tomorrow's non-manufacturing ISM data will also be important in this regard.

This improved US economic backdrop should continue to weigh on EUR-USD in the short-term, especially in light of the hefty long EUR-USD positioning still in place. Latest IMM positioning data for last Tuesday showed that net longs for specs were at 94,319, down only marginally from the 95,287 seen the previous week. While this is well off the heights seen in the middle of May (119,538), it remains uncomfortably high and liquidation risk is still in place. Our initial target of 1.3340 remains valid for the short-term.

The UK MPC is likely to leave rates unchanged at Thursday's meeting, but the market will carry uncertainty about the outcome and this should support GBP until then. However, unchanged rates would leave cable vulnerable at the end of the week. Resistance is at 1.9900 (May 23 and 29 highs) and support is at 1.9730.

EUR-SEK has remained at higher levels following the damage to sentiment inflicted by last week's retail sales and GDP data. With the ECB meeting firmly in the market's sights there is unlikely to be any respite in the early part of this week. However, if as seems likely, the ECB fails to advance hawkish money market expectations any further, there should be a pullback, so any further cross strength over the next day or two could provide a selling opportunity. The 9.36-9.39 area has been the limit of upmoves on other occasions over the past nine months or so and should act as reasonable resistance.

Day Ahead
US - factory orders data will show whether there have been any revisions to the durable orders data released on May 24, which was reasonably solid - ex-transport orders up 1.5% m/m.

UK - the BRC retail sales survey for May is due tonight and if the CBI data is any guide it should show sales holding up reasonably well. However, the two surveys were not well correlated in April, when the CBI survey was very strong ( 44% of retailers reporting higher y/y sales volumes) and BRC sales values were a tepid 2.4% y/y.

Diary
Data/event BST Consensus*
Market holiday - New Zealand, Ireland 
EU PPI (Apr) y/y 10.00 2.3%
TR CPI (May) y/y 14.30 9.7%
US Factory orders (Apr) m/m 15.00 0.7%
GB BRC retail survey (May) y/y 00.01 2.4% last
AU Current account (Q1) 02.30 -A$14.8bn
AU Building approvals (Apr) m/m 02.30 2.5%
Latest data Actual Consensus*
JP Capital spending (Q1) y/y 13.6% 10.1%
JP Monetary base (May) y/y -5.7% -6.1%
AU ANZ job ads (May) m/m 10.3% 3.5% last
NO PMI manu (May) 64.9 63.3 last
* Consensus unless stated