Euro Pulls Back From 1.2300, British Pound Holds Within Previous Day’s Range

The Euro pared the overnight advance to 1.2325 and continued to hold below the 20-Day SMA at 1.2416, and the single-currency may trend sideways throughout the U.S. trade as European policy makers talk down the risks for contagion.

European Central Bank board member Lorenzo Bini Smaghi argued that the Governing Council’s bond purchase plan does not involve any “considerable risks,” and said that the extraordinary measures are “sterilized” by the ECB during an interview with an Italian newspaper.

At the same time, Standard and Poor’s said that the recent depreciation in the euro is likely to benefit the region as European exports become increasingly competitive on a global scale, but warned that the economy is “still running unhurriedly at two speeds” as the debt crisis weighs on the nations operating under the fixed-exchange rate system. As policy makers expect to see an uneven recovery this year, the ECB is widely expect to maintain a loose policy stance over the coming months in an effort to encourage a sustainable recovery, but the spillover effects could lead the Governing Council to support the economy throughout the second-half of the year as the nations tied to the single-currency struggle to bring their public budget back in-line with the stability pact. Meanwhile, the economic docket showed manufacturing and service-based activity in the Euro-Zone expanded at a slower pace in May, with the composite index falling back to 56.4 from a three-year high of 57.3 in the previous month, while retail spending unexpectedly slipped 1.2% in April to mark the biggest decline since October 2008.

The British Pound was little changed overnight, with price action holding within the previous day’s range, but the GBP/USD looks poised to retrace the decline in May as it carves out a near-term bottom above 1.4200. However, as Bank of England Governor Mervyn King maintains a cautious outlook for the economy and expects inflation to fall back to the 2% target over the medium-term, the dovish rhetoric held by the central bank could drag on the exchange rate as investors weigh the prospects for future policy. Nevertheless, a report by Nationwide showed home prices increased for the third consecutive month in May, with the index increasing 0.5% from the previous month to exceed expectations for a 0.3% rise, and conditions are likely to improve going forward as the economic recovery gathers pace. Meanwhile, a separate report showed service-based activity in the U.K. expanded at a faster pace in May, with the PMI reading increasing to 55.4 from 55.3 in April, which fell short of expectations for a rise to 55.7.

The greenback was mixed during the European trade, with the USD/JPY extending the previous day’s advance to reach a high of 92.72, and the reserve currency is likely to face increased volatility throughout the North American session as the economic docket is expected to foreshadow an improved outlook for future growth. The ADP employment report for May is anticipated to show a 70K rise in private payrolls following the 32K expansion in the previous month, while the ISM Non-Manufacturing index is forecasted to increase to 55.6 from 55.4 in April, which would be the highest reading since 2006. At the same time, factory orders are projected to rise another 1.8% in April after climbing 1.3% in the month prior, and the recent developments could lead the Fed to hold an improved outlook for the economy as the economic recovery gathers pace.