Euro Slides As France Calls For An Emergency Meeting at EU Summit, US Philly Fed… … Index Plunges,Causing Concern For National ISM, UK Consumer Spending Growth Continues to Weaken

US Dollar
The dollar is acting rationally against every other major currency except for the
euro and the Swiss franc. Today's much weaker than expected Philadelphia Fed survey
should have sent the dollar plunging. It did, but only momentarily before the pair
did a 360-degree turn to collapse back to the early European trading levels. The
dollar did however sell-off against the British Pound, as well as the Australian,
New Zealand and Canadian dollar. The market had originally expected the Philly Fed
survey to improve to 10.0 from 7.3 in May. To everyone's surprise and in complete
contrast to the Empire State survey, the Philly Fed plunged to *2.2. Both new
orders and shipments eased, providing cause for concern. The expectations and
employment components edged higher, suggesting that the components were stronger
than the headline report. Even so, there is no denying that the latest release
could push the national ISM index below the 50 boom/bust line. In the continual
“when will the Fed stop tightening” debate, Kansas City Fed President Hoenig shed
some more light on Fed's policy. He said that the Fed wants to get to the neutral
rate “sooner rather than later” and that most economists are predicting that neutral
lies somewhere between 3.50% and 4.50% – so that will be what they are shooting for.
His comments are a bit more hawkish and suggest that recent data has not deterred
the Fed's policy makers. A quarter point hike is a shoe-in at the end of this month
with an August rate hike also a near certainty. After that, the rest is pretty much
up in the air. The fact that oil prices climbed to a two month high is also
disconcerting. Greenspan has already warned that they are closely watching the
trend of energy prices. If you recall, rising oil prices was one of the primary
triggers for the slow patch that the global economy entered around November of last
year. Since then, the world has been struggling to grow.

Euro
The European Summit across the Atlantic has made it very difficult for the Euro to
rally with each move higher met with equally strong selling interest. Things are not
going well out there. French President Chirac called for an emergency summit to
discuss the European Union's future. Everyone attending the summit agreed that they
have lost touch with the needs of their citizens and need to do some
“soul-searching.” The progress so far is summed up best by Edward Hughs on a
Fistful of Euros – “European leaders plunged into a full-blown crisis at a summit,
with a battle raging over long-term EU financing and their lofty plans for an EU
constitution nearly in tatters***..French President Jacques Chirac called for an
emergency meeting to extricate the bloc from the mess created by deep splits over
the bloc's budget and by a growing popular revolt against the proposed EU treaty*.
Leaders had hoped a deal on the 2007-2013 EU budget would let them show a united
front after French and Dutch voters delivered stinging rejections of their
constitution, meant to lay the ground rules for an enlarged 25-nation alliance.
Instead, the summit was overwhelmed by an embarrassing squabble over money, with
British Prime Minister Tony Blair refusing demands by the other 24 EU nations, led
by France, that he surrender an annual budget rebate.

British Pound
Rocketing higher earlier on in the session, merely missing the 1.8300 figure, the
British pound plummeted on rather tepid retail sales figures as whispers of a
slowdown were heard throughout the market. Expected to rise to a 1.8 percent
reading in the month of May, the report rose a disappointing 1.3 percent on an
annualized basis. Additionally disappointing was the fact that the consensus
estimate was far below the previous period's 2.3 percent rise and continues the
overall decline in the figure since September of 2004. So far sales receipts,
indicative of consumer demand, has fallen from a high of 7.2 percent over the past
nine months suggesting softer consumption patterns. As a result, coupled with
softer housing data earlier on in the week, there seems to be increasing
justification for the recent rate decision by the Bank of England officials. With
that said, speculation looks to be mounting on an expected rate cut decision to once
again bolster consumer demand and boost the paltry production figures as of late.
Currently, short sterling futures are pricing in no further hikes in the benchmark
repurchase rate with any subsequent cuts unbecoming till earlier in 2006.

Japanese Yen
Gaining for the third straight session, the Japanese yen moved higher on better than
expected machine tool orders data and relatively nothing else. With suggestions of
a slowdown in global foreign demand, economists were pleasantly surprised as orders
rose more than expected. Rising 2.5 percent on an annualized basis in the month of
April, the data resides below the 13.2 percent surge in the previous period and may
be indicative of a retracement till inventories are reestablished in the near term.
Separately, the currency of the world's second largest economy did not seem hampered
by two-month highs hit by crude oil during the session, touching intraday highs of
$56.90. This is particularly interesting since Japan imports close to 98% of its
oil and should crude prices continue to rise, output would be adversely affected, as
would the spot rate. Taking that into consideration, traders will be looking
towards the leading and co-incident indicators tomorrow as the final April figures
are set for release. Estimated to improve slightly over the month, the leading
indicators may contribute little towards price action capping the week, as it is a
compendium of previous releases and subsequently highly predictable.

Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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