Euro Maintains Rally as Policy Makers Raise Economic Outlook, British Pound Halts Two-Day Rally

The Euro maintained the short-term rally from earlier this week and pushed to a high of 1.2140 during the overnight trade, and the exchange rate may continue to trend higher going into the U.S. trade as European policy makers hold an improved outlook for the region.

Germany’s central bank raised its economic assessment for Europe’s largest economy and projects GDP to expand 1.9% this year versus an initial forecast for 1.6% rise in the growth rate as the recovery gathers pace, but went onto say that inflation is expected to stay moderate over the medium-term despite the recent depreciation in the euro.

At the same time, European Central Bank board member Juergen Stark said that the Governing Board’s asset purchase plan Is “temporary in nature” during a speech in Frankfurt, and noted the financial markets are “overshooting and overemphasizing” the fiscal turmoil within the region. In addition, ECB council member Nout Wellink voiced his support for the government bond purchase scheme and said that the extraordinary measure is “a good idea,” and went onto say that the decision was “necessary” during a conference in Vienna. Meanwhile, the economic docket showed wholesale price in Germany increased 0.3% in May to top forecasts for a 0.2% rise, while the annualized rate advanced 6.2% from the previous year, which marked the fastest pace of growth since August 2008.

The British Pound halted the two-day rally and slipped to a low of 1.4626 during the European trade as the economic docket reinforced a weakened outlook for the region, and the Bank of England may look to support the economy throughout the second half of the year as policy makers continue to see a risk for a protracted recovery. Producer prices in the U.K. increased 0.3% in May, which failed to meet forecasts for a 0.5% rise, while the annualized rate slipped to 5.7% from a revised 5.9% in April. In addition, industrial outputs unexpectedly weakened 0.4% in April versus projections for a 0.4% advance, while manufacturing slumped 0.4% during the same period to mark the first decline in three-months. As the economic outlook for the U.K, remains clouded by the uncertainties surrounding the prospects for future policy, the GBP/USD may trade within its recent range going into the following week as market participants speculate the BoE to support the economy throughout the second-half of the year.

The greenback strengthened against most of its major counterparts, with the USD/JPY extending the previous day’s advance to reach a high of 91.77, and the reserve currency may continue to gain ground during the North American trade as the economic docket is expected to reinforce an improved outlook for future growth. Household spending in the world’s largest economy is expected to rise 0.2% in May after expanding 0.4% in the previous month, while the U. of Michigan consumer confidence survey is forecasted to rise to 74.5 in June from 73.6 in the previous month, which would be the highest reading since January 2008. Moreover, business inventories are projected to expand for the third consecutive month in April, with market participants forecasting a 0.5% rise, and the data could spur expectations for a Fed rate hike later this year as the outlook for future growth improves.