Forex: Euro Halts Three-Day Rally, U.S. Dollar Benefits From Safe-Haven Flows

Talking Points

Japanese Yen: Benefits From Risk Aversion
Pound: BoE Sees “Substantial Headwinds”
Euro: Manufacturing, Services Slows More-Than-Expected
U.S. Dollar: Existing Home Sales, Leading Indicator on Tap

Dismal data coming out of the Euro-Zone pushed the single-currency to a low of 1.3311 during the overnight trade, and the exchange rate may continue to push lower throughout the day as investors scale back their appetite for risk. The EUR/USD halted the three-day rally, with the daily relative strength index pulling back from overbought territory, and we may see the exchange rate fall back towards the 200-Day SMA at 1.3208 going into the end of the week to test for short-term support. As the RSI falls from a high of 74, the downturn in the oscillator suggest that a corrective retracement will unfold going into the following week, and a break below the 200-Day moving average is likely to expose the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120-30.

Meanwhile, the economic docket showed manufacturing and service-based activity in the Euro-Zone grew at a slower pace in September, with the composite index falling back to 53.8 from a revised 56.2 in July amid forecasts for a 55.7 print. At the same time, a spokesman for the European Commission talked down fears surrounding Greece and said that there is “no discussion” of providing addition funds to the ailing economy” during a press release in Brussels. The commission went onto say that it expects borrowing rates for Greece to normalize by the end of its three-year program, but the austerity measures taken on by the government is likely to weigh on the recovery as policy makers withdraw fiscal support. As the rebound in economic activity cools, managing the downside risks for the region will certainly become an increasing challenge for the European Central Bank, and the uncertainties surrounding the growth outlook could weigh on the exchange rate over the medium-term as the Governing Council expects to see an “uneven” recovery.

 The British Pound held within the previous day’s range, with the exchange rate rising to 1.5305 during the European trade, and the currency may hold steady throughout the day as price action fails to hold above the 38.2% Fibonacci retracement from the 2009 low to high around 1.5700. As the GBP/USD carves a near-term top, the exchange rate my work its way back towards the lower bounds of its recent range going into the end of the week, which lies around 1.5300. Nevertheless, Bank of England Chief Economist Spencer Dale said the U.K. faces “substantial headwinds” as the banking sector remains fragile, and went onto say that the economic recovery needs to be sustainable during an interview with the Western Mail. As policy makers hold a cautious outlook for the region, we are likely to see the BoE maintain the expansion in monetary policy throughout the remainder of the year, but the stickiness in price growth could spur interest rate expectations as inflation continues to hold above the government’s 3% limit.

The greenback bounces back against most of its major counterparts, while the USD/JPY fell back from a high of 84.66 ahead of the U.S. trade, and the dollar may continue to gain ground throughout the day as it benefits from safe-haven flows. Nevertheless, the economic docket is expected to show existing home sales in the world’s largest economy increase 7.1% in August following the record-pace of contraction during the previous month, while the leading indicator is projected to tip 0.1% for the second consecutive month in August. As risk sentiment continues to dictate price action in the currency market, the data could stoke a rebound in market sentiment as the outlook for future growth improves.

 

 

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Forex: Euro Carves Near-Term Top, U.S. Dollar Benefits From Safe-Haven Flows

Talking Points

Japanese Yen: Strengthens Across the Board
Pound: Remains Range Bound Ahead of BoE Minutes
Euro: ECB Says Rates “Appropriate”
U.S. Dollar: Industrial Production, NAHB Housing Index on Tap

The Euro slipped to a low of 1.3830 during the overnight trade as policy makers in Europe held a cautious outlook for the region, and the single-currency may trend lower throughout the day as investors scale back their appetite for risk. European Central Bank President Jean-Claude Trichet said that the Governing Council remains “cautious” on the recovery during a conference in Marrakech, Morocco, and warned that excess volatility in the currency market could have an adverse effect on economic stability as it bears down on global trade. Mr. Trichet argued that the euro-area needs “more ambitious” reforms as the governments operating under the fixed-exchange rate system struggle to manage their public finances, and went onto say that most members of the ECB agrees with continuing its asset purchase program as the economic outlook remains clouded with uncertainties.

At the same time, Governing Council board member Ewald Nowotny voiced his support to maintain the emergency programs during an interview with an Austrian newspaper and said that the extraordinary measures will help to “correct imbalances in the capital markets” as the global financial system remains fragile. As European policy makers retain a cautious outlook for the region, we may see the ECB maintain the expansion in monetary policy throughout the beginning of 2011, and the soft tone held by the central bank could drag on the exchange rate as investors weigh the outlook for future policy. As the EUR/USD struggles to hold above 1.3900, the 61.8% Fibonacci retracement from the 2009 high to the 2010 low, we may see a corrective retracement unfold this week as the daily relative strength index finally falls back from overbought territory, and the exchange rate may work its way back towards the 50.0% Fib at 1.3500 to test for near-term support.

The British Pound slipped to a low of 1.5837 on Monday to maintain the narrow range from the previous week, and the GBP/USD may continue to trend sideways over the next 24 hours of trading as investors wait for the Bank of England policy meeting minutes due out on Wednesday at 8:30 GMT. We expect to see an 8-1 vote count amongst the MPC as board member Andrew Sentance sees scope to start normalizing monetary policy, but the central bank may hold a dovish tone for future policy given the substantial amount of slack within the real economy. However, a three-way split within the central bank is likely to trigger a selloff in the British Pound as market participants speculate the BoE to expand monetary policy further, and lead the GBP/USD to retrace the advance carried over from the previous month. Nevertheless, the economic docket showed home prices in the U.K. increased at the fastest pace in eight months, with the Rightmove index jumping 3.1% in October following the 1.1% in the previous month, and the stickiness in price growth could lead the BoE to maintain a neutral policy stance going into the following year as it aims to balance the risks for the economy.

The greenback continued to bounce back against most of its major counterparts, while the UJSD/JPY slipped to a low of 81.12 as the Japanese Yen strengthened across the board, and safe-haven flows are likely to dictate price action throughout the day as the economic docket remains fairly light for Monday. Industrial outputs in the world’s largest economy is forecasted to expand 0.2% for the second consecutive month in September, while the NAHB housing market index is projected to increase to 14 in October from 13 in the month prior, but the dollar may show little reaction to the economic developments as risk trends continue to dictate price action in the foreign exchange market.

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Forex: Euro Under Pressure, U.S. Dollar Benefits From Safe-Haven Flows

Talking Points

Japanese Yen: Slightly Mixed Across the Board
Pound: U.K. Construction Expands At Faster Pace
Euro: Investor Confidence Improves Further
U.S. Dollar: Pending Home Sales, Fed Chairman Bernanke on Tap

As EUR/USD price action holds below the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-90, a corrective retracement could unfold in the days ahead as the rally from the September remains overbought, and the daily relative strength index should fall back below 70 this week if we see the exchange rate work its way back towards the 50.0% Fib around 1.3500. The euro-dollar showed little reaction to the Sentix survey even though the report showed investor confidence increased to a three-year high of 8.8 in October from 7.6 in the previous month, and shift in market sentiment could drive the exchange rate lower throughout the day as risk trends continue to dictate price action in the currency market. However, if the euro-dollar is able to find short-term support around the 50.0% Fib, there could be a phase of consolidation over the coming weeks given the uncertainties surrounding the economic outlook, and the EUR/USD may trend sideways before we see another breakout in the exchange rate.

Meanwhile, Ireland’s central bank lowered its growth forecast for the region and expects GDP to expand 0.2% this year amid an initial forecast for a 0.8% rise, while the growth rate is anticipated to increase 2.4% next year versus earlier projections for a 2.8% expansion. The central bank went onto say that the recovery in Europe remains “uneven” as the rebound in economic activity appears to be tapering off in the second-half of the year, and went onto say that the outlook remains clouded by high uncertainties as the governments operating under the single-currency struggles to manage their public finances. In addition, the economic docket showed producer prices in the Euro-Zone increased at an annual pace of 3.6% in August after expanding 4.0% in the previous month, and the slower pace of inflation paired with the slowing recovery could lead the Governing Council to maintain a dovish policy stance going into 2011 as it aims to balance the risks for the region.

The British Pound bounced back from a low of 1.5748 during the European trade as U.K. policy makers held an improved outlook for the region, but the GBP/USD is likely to trade within the narrow range carried over from the previous week as price action struggles to hold above 1.5900. Chancellor of the Exchequer George Osborne said the economy has “moved out of the danger zone” during an interview with BBC Radio, while former Bank of England Deputy Governor John Gieve talked down speculation for a further expansion in quantitative easing and said interest rates will have to rise going forward according to an article in the Guardian newspaper. As investors mull over the outlook for future policy, the GBP/USD is likely to hold steady ahead of the BoE interest rate decision later this week, but the central bank may refrain for releasing a policy statement like we’ve seen for the past few months.

The greenback bounced back against most of its major counterparts, with the USD/JPY rallying to a high of 83.86 overnight, but the dollar is likely to face increased volatility later today as the economic docket is expected to reinforce a mixed outlook for the world’s largest economy. Pending home sales in the U.S. is forecasted to increase 0.9% in August following the record 20.1% drop in the previous month, while factory orders are projected to fall 0.4% during the same period after tipping 0.1% in July. In addition, Fed Chairman Bernanke is scheduled to speak regarding the economy later today, and comments from the central bank head could shake up the majors as investors weigh the prospects for future policy.

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