Japanese corporate sentiment is expected to continue to deteriorate in June, reflecting a declining stock market and weakness in exports and industrial production as the global economy slows down. A BridgeNews survey suggests that the Bank of Japan's quarterly survey of the net percentage of firms that see business conditions as favorable will show a continued decline from March. The BOJ survey is due out Monday.
The median forecast in a BridgeNews poll of analysts is for Japanese industrial production to fall 0.2% on the month in May. In April, industrial production fell a well below forecast 2.0% m/m, while METI forecasts a 0.3% m/m increase in May. The data is released at 2350 GMT. April's sharp fall in production is not expected to have been enough to clear the overhang of excess inventories, which should have resulted in a further cut in output in May. Additionally, while available data suggests raw material output to have been in line with producers' initial forecasts, machinery output is expected to have suffered a further cut. Deteriorating demand in Japan's overseas markets will also have resulted in lower output.
However, while another sharp fall in production is likely to undermine the JPY, any significant reaction may have to wait until the BOJ's policy announcement is out of the way. The announcement should be made in late Asian trading on Thursday. The BOJ is not expected to change its interest rate policy, though the market is likely to trade on a cautious footing as the Bank may announce further liquidity enhancing measures. The outlook is bearish for the yen as the dollar rally begun the beginning of June has resumed.
Overnight, a 2-day high of 123.74 in early trading in a continuation of bidding from U.S. banks in the overnight session. The pair ran into selling from Japanese exporters, however, and dipped back to the 124.25 area.

Support: 123.75 (overnight low), 122.50 (Gann 50-point pivot; targets: 122.00/123.00), 122.29 (60-day moving average), 121.05 (Gann 50-point pivot; targets: 120.55/121.55), 121.99 (20-day moving average), 119.65 (Gann 50-point pivot; targets: 119.15/120.15), 119.00 (38.2% Fibonacci retracement level of the August 1998-December 1999 downtrend), 118.30 (June 1 trough; 3-month low), 118.25 (Gann 50-point pivot; targets: 117.75/118.75).
Resistance: 124.44 (overnight high), 124.00 (Gann 50-point pivot; targets: 123.50/124.50), 125.50 (Gann 50-point pivot; targets: 125.00/126.00), 126.84 (April 2 high; 29-month high).

Downside economic risks are mounting in the euro zone, according to European Commissioner for Economic and Monetary affairs, Pedro Solbes. Solbes said he expected deterioration in euro-zone budgets this year and ominously warned that four states should not use automatic stabilizers. He said these countries were still not close to a balanced budget and that their 3% deficit cap was in danger.
Euro zone current account deficit widened in April even as ECB's Wim Duisenberg said euro depreciation is over. The depreciation of the euro is over and inflation in the euro zone will fall to just below the European Central Bank's 2% target in 2002, ECB president Wim Duisenberg said in an interview with Italian daily La Republicca. He added that there is no risk of a recession in Germany and in the euro zone, with Europe's economic growth more or less in line with its potential growth trend of 2.0-2.5%.
The EU Commission is considering easing its position on budget deficit reduction, according to financial daily La Tribune, which cited no sources. The commission will examine Wednesday a document prepared by Solbes, that proposes that when demand slows, automatic stabilizers should be allowed to operate, the paper said. Solbes proposes that, as long as member states maintain their deficit under the 3% of GDP mark, they not be condemned by the commission for not meeting their deficit reduction targets.
The outlook is mixed for the euro as an overnight rally against the dollar could not be sustained.

Support: 0.8618 (overnight low), 0.8540 (20-day moving average), 0.8411 (June 11 low; 6-month low), 0.8372 (Nov. 23 low), 0.8245 (1.382% Fibonacci extension level the Jan. 6-May 4, 19 downtrend; target of fifth Elliott wave), 0.8228 (Oct. 26 low; lifetime low).
Resistance: 0.8659 (overnight high), 0.8673 (June 15 peak), 0.8790 (38.2% Fibonacci retracement level of the June-October downtrend), 0.8848 (61.8% Fibonacci retracement level of the Nov. 27-Jan. 5 uptrend).
EUR/JPY broke above the psychological 107.00 as the euro continues to firm against the yen.
The outlook is bullish within a channel rising since June 1.

Support: 106.76 (overnight low), 99.85 (June 1 low; 5 1/2-month low), 97.22 (Dec. 12 trough).
Resistance: 107.70 (overnight high), 105.80 (38.2% Fibonacci retracement level of May 1999-October 2000 downtrend).

Cable was lifted to a 1-month high around 1.4225 as the USD slipped in early trading, pushing EUR/GBP to an intraday low around 0.6075. The BBA said U.K. bank lending "remained buoyant" in May. U.K. mortgage lending rose 2.993 bln GBP in May, up 14% m/m, while total personal loans rose 2.982 bln GBP in the same month, up 9% m/m.
The outlook is for a slightly higher sterling with gains capped at the 60-day moving average of 1.4216

Support: 1.4152 (overnight low), 1.3688 (June 12 low; 15 1/2-year low), 1.3660 (February 1986 trough).
Resistance: 1.4224 (overnight high), 1.4023 (20-day moving average), 1.4216 (60-day moving average).