British Pound Remains Supported by 50-Day Moving Average, Euro Continues to Hold Range

Talking Points
•    Japanese Yen: Advances Across the Board
•    Pound: U.K. CBI Sales Gauge Rises for Second Month in October
•    Euro: M3 Money Grows at Slowest Pace on Record
•    US Dollar: Consumer Credit, Treasury Secretary Geithner on Tap

British Pound Remains Supported by 50-Day Moving Average, Euro Continues to Hold Range

The British pound advanced for the second-day and cross back above the 100-Day SMA (1.6365) after finding intraday support ahead of the 50-Day (1.6268), and the currency may continue to retrace the sell-off from the previous month as investors maintain long-term expectations for higher interest rates in the U.K. However, Bank of England board member Adam Posen held a dovish outlook for price growth and said that there was “no evidence” that the asset purchase program would lead to inflation, and the central bank may look to ease policy further over the coming months as the economy fails to emerge from the worst recession since the post-war period.

Meanwhile, Prime Minister Gordon Brown pledged to end “sharp practices” carried out by U.K. lenders and seeks to ban credit card practices of making borrowers finance their cheapest debt first, along with plans to raise the minimum level of repayment in an effort to help households to climb out of debt. In addition, the government will look to prohibit re-pricing of existing debt, and plans to bar lenders from making unsolicited increases to borrowing limits. Nevertheless, the U.K. CBI Distributive Trades survey reinforced an improved outlook for household spending as the index for sales increased to 8 in October from 3 in the previous month, with the gauge expected to rise to 19 in November, and conditions are likely to improve throughout the second-half of the year as policy makers take unprecedented steps to stimulate the ailing economy.

The Euro slipped to a low of 1.4849 during the overnight session, but the lack of momentum to break below the 20-Day SMA at 1.4824 may keep the EUR/USD confined within a narrow range going into the North American trade as investors weigh the outlook for future policy. A report by the European Central Bank showed private-sector loans fell at an annual pace of 0.3% in September to mark the first decline on record, while the M3 money supply increased 1.8% from the previous year, which is the slowest pace of growth since the series began, and the Governing Council is likely to hold a dovish policy stance going forward as the outlook for growth and inflation remains weak. Meanwhile, the single-currency weakened against the Japanese yen for the second-day after failing to break above 139.00, and the EUR/JPY may continue to retrace its longest winning streak since December 2000 as market participants curb their appetite for higher risk/reward investments.

Dollar price action was mixed across the board, with the greenback halting the five-day rally against the Japanese yen to trade at 91.90, and the reserve currency is likely to face increased volatility going into the U.S. trade as the economic docket is expected to reinforce an improved outlook for the world’s largest economy. The Conference Board’s consumer confidence index is expected to improve in October, with economists forecasting the gauge to rise to 53.5 from 53.1 in the previous month, while the S&P/CaseShiller home price index is expected to fall at an annual pace of 11.90% in August after declining 13.30% in the previous month. At the same time, the Richmond Fed’s manufacturing index is anticipated to hold at 14.0 for the fourth consecutive month in October, while investors may react to comments from Treasury Secretary Timothy Geithner, who is scheduled to speak at the Securities Industry and Financial Markets Association’s meeting at 16:00 EST.


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

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