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Forex: Relief for now

The overnight price action has been positive in terms of risk assets in general. Oil has retreated a touch on the back of events in Iraq, as the army holds ground and has regained some key territory near border oil instillations. The yen has weakened, allowing USDJPY to move up to 102.00 but overall volatility remains low. The market is still unsure how to play the Iraqi situation, which remains a risk for the summer period as liquidity falls and the risk of bigger price swings on the back of unfolding events increases.
For today, the IFO survey in Germany has already shown a weaker than expected headline reading, falling to 109.7 from 110.4, although the single currency has managed to move up towards the 1.3620 level in the wake of the numbers. For later, there is Consumer Confidence data in the US, together with New Home Sales at 14:00 GMT, where expectations are for a rise from 83.0 to 83.5. We can also expect sterling to have a close eye on testimony from BoE members before parliament today. Members, including the Governor, are appearing and are likely to face a tough time given that the subject is the Inflation Report released last month which now seems have been overtaken by the change in tone from both the committee and Governor. Sterling has taken a breather after the gains of the past 2 weeks, but is still holding above 1.70 on cable, with EURGBP just holding below the 0.80 level. Longer term, we still expect the currency to gain on the view that rates will rise before year end, something which is not fully factored into the sterling price.

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