Euro, British Pound Fail to Hold Ground as U.S. Dollar Rallies on Risk Aversion

Talking Points
•    Japanese Yen: Mixed Across the Board
•    Pound: Retail Sales Unexpectedly Holds Flat in September
•    Euro: Slips Back Below 1.5000
•    US Dollar: House Price Index, Leading Indicator on Tap

Euro, British Pound Fail to Hold Ground as U.S. Dollar Rallies on Risk Aversion

The Euro pulled back from the yearly high and slipped back below 1.5000 following the rise in risk aversion, and the single-currency may test the 10-Day SMA (1.4903) for short-term support going into the North American trading session as equity futures foreshadow a lower open for the U.S. market. Meanwhile, the economic docket showed the Euro-Zone current account fell into deficit in August, with the seasonally adjusted reading declining to -1.3B from a revised reading of 3.7B in July.

At the same time, the euro-area’s debt-to-GDP ratio widened to 69.3% in 2008 from 66.0% in the previous year, with five of the 16 members breaching the European Union’s limit, while Italy posted the highest short-fall in the region as government debt jumped to 105.8% of GDP. Nevertheless, European Central Bank council member Axel Weber held a dovish tone during a speech in Jerusalem and said that “there is surely no need to rush for the exit” as policy makers anticipate price growth to average 0.4% this year and 1.2% in 2010. As the Governing Council expects price pressures to remain subdued going into the following year and sees a risk for a protracted recovery, the ECB is likely to hold a neutral policy stance going forward, and the euro may continue to lose ground over the remainder of the week as investors weigh the outlook for future policy.

The British pound weakened from the previous day and slipped to a low of 1.6487 as U.K. retail sales unexpectedly held flat in September. The breakdown of the report showed discretionary spending on clothing and footwear weakened for the third-month, while food sales slipped 0.1% from August, and the outlook for private consumption remains weak as households face a weakening labor market paired with tightening credit conditions. Meanwhile, Bank of England Deputy Governor Paul Tucker held an improved outlook for the economy and said that the U.K. looks to be on the road to recovery, but argued that expanding the central bank’s asset purchase program “would be possible” if conditions warrant. As policy makers see the economy emerging from the worst recession since the post-war period, long-term expectations for higher interest rates in the U.K. is likely to support the recent rally in the GBP/USD, and the pair may continue to retrace the sell-off from the previous month as the outlook for growth and inflation improves.

The greenback advanced across the board as investors scaled back their appetite for higher-yielding assets, and the reserve currency may continue to appreciate as market participants curb their outlook for global growth. Nevertheless, the U.S. leading indicator is expected to improve for the sixth consecutive month in September, with economists forecasting the index to rise 0.8% from the previous month, while the house price index is anticipated to increase 0.3% for the second month in August. As the economic outlook for the world’s largest economy improves, investors may ramp up expectations for higher borrowing costs as policy makers see the nation emerging from the recession, and the rebound in the interest rate outlook may lead the U.S. dollar to retrace the sharp sell-off during the second-half of the year.


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