Euro Poised to Test 1.50, British Pound Finds Support at 100-Day SMA

Talking Points
•    Japanese Yen: Strengthens Across the Board
•    Pound: Budget Deficit Hits Record High
•    Euro: Construction Weakens for Fourth Month
•    US Dollar: Producer Prices, Housing Starts on Tap

Euro Poised to Test 1.50, British Pound Finds Support at 100-Day SMA

The Euro pushed to an intraday high of 1.4996 during the Asian trade and looks poised to test 1.5000 for psychological resistance however, the single-currency remains little changed on the day following the rebound in risk aversion and may continue to hold a narrow range going into the U.S. session. Meanwhile, Heri Guaino, French President Nicolas Sarkozy’s advisor, said that weakness in greenback may become “unbearable” as the U.S. government tries to “reduce its debt by repaying in a depreciated currency,” and went onto say that European policy makers may have to “weaken the euro” to balance the risks for the economy.

Nevertheless, the economic docket showed German producer prices fell 0.5% in September amid expectations for a 0.1% decline, with the annualized rate tumbling 7.6% from the previous year led by cheaper energy prices. Moreover, construction outputs slipped 0.4% in August to mark the fourth consecutive monthly decline, while building activity weakened 11.3% from the previous year, and conditions may get worse throughout the second-half of the year as policy makers anticipate economic activity to remain subdued going into 2010. At the same time, European Central Bank President reiterated “excessive volatility and disorganized developments in the exchange market was bad for economic development,” and reaffirmed “a shared interest” for a strong U.S. dollar policy to help stabilize the global financial system. The comments suggests policy makers are becoming weary of the appreciation in the exchange rate as it hampers the prospects for a sustainable recovery, and the Governing Council may keep rates on hold going into the following year in an effort to keep the economy afloat.

The British pound pared the overnight decline after finding intraday support ahead of the 100-Day SMA at 1.6351 and remains little change from the previous day to hold above 1.6400. Meanwhile, public-sector borrowing in the U.K. increased to 14.8B in September from a revised reading of 14.7B in the previous month to mark the biggest deficit since recordkeeping began in 1993, with the public sector net cash requirement rising to a 25-year high of 19.4B during the same period, and conditions are likely to get worse as the HM Treasury forecasts public borrowing to reach 12.4% of GDP in the year through March 2010. At the same time, the M4 money supply increasing 0.7% during the same period amid expectations for a 0.5% rise, while the annual rate slipped to 11.3% from the previous year after growing 12.1% in August, and the data suggests that the Bank of England’s asset purchase program is having a positive effect of the overall economy as policy makers take unprecedented steps to stem the downside risks for growth and inflation.

The U.S. dollar strengthened against its higher-yielding counterparts following the slump in risk appetite, and the greenback may continue to appreciate going into the North American trade as the reserve currency benefits from safe-haven flows. At the same time, the economic calendar is likely to spark increased volatility in the currency market as economists forecast producer prices to hold flat in September and expect housing starts to reach a 10-month high of 610K for the same period.


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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com