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European Session – Euro regains 1.14 handle as markets await Eurogroup, dollar pressured by soft US CPI, Fed

All eyes are on the Eurogroup meeting today now that the FOMC meeting is out of the way. However, some key economic data from the UK and US briefly stole investors’ attention.

May retail sales for the UK rose above expectations, by 0.2% m/m versus 0% forecast. Retail sales excluding auto fuel came in at 4.4%, above expectations of 4.3%. Today’s data coupled with Wednesday’s strong UK employment data helped lift the pound higher. In addition, a broadly softer US dollar also drove cable higher, to reach a 7-month high of 1.5929 today.

From the US, lower initial jobless claims numbers helped soften the blow from disappointing inflation data. The labor market continued to show signs of improvement as the number of weekly applications for unemployment benefits decreased to 267,000 from 279,000 last week. But core CPI missed to the downside and rose 1.7% y/y, versus 1.8% expected. This is below the Fed’s 2% target rate and this data is supportive of the Federal Reserve’s position to keep rates unchanged.

The dollar dipped lower in a knee jerk reaction to the CPI data, touching 122.47 yen before recovering on a more optimistic Philly Fed manufacturing index. It rose to 15.2 in June versus 8.1 expected and above a prior 6.7. But the greenback is still under pressure after the post-FOMC tumble on Wednesday. The Fed signaled it sees no current need to raise interest rates.

The weaker dollar helped support the euro, which regained the 1.14 handle for the first time in 4 weeks to peak at 1.1427. Amid uncertainty over Greece, the single currency has been surprisingly resilient, as markets remain quietly optimistic that a deal will be reached. The Eurogroup meeting held in Luxembourg today will be crucial for determining debt relief for Greece, as it faces a June 30 IMF payment. German Chancellor Angela Merkel is showing willingness to cooperate and wants to keep Greece in the Eurozone, while Eurogorup Chief Jeroen Dijsselbloem is more pessimistic and does not think a deal could be reached at the meeting of Eurozone finance ministers.

Looking ahead to Friday, at the top of the economic calendar is the Bank of Japan monetary policy statement.

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