Euro, British Pound Advance Ahead of U.S. 3Q GDP

Talking Points
•    Japanese Yen: Weakens Across the Board
•    Pound: Mortgage Approvals Hit 18-Month High
•    Euro: German Unemployment Unexpectedly Falls, Confidence Improves
•    US Dollar: Advanced 3Q GDP on Tap

Euro, British Pound Advance Ahead of U.S. 3Q GDP

The Euro halted the four-day decline against the greenback and extended the overnight rally to reach a high of 1.4760 following the unexpected drop in German unemployment, and the single-currency may continue to trend higher over the coming month as the EUR/USD remains well-supported by the 50-Day SMA at 1.4636. Meanwhile, European Central Bank board member Guy Quaden held a cautious outlook for the region as he expects inflation to remain subdued over the coming months, and went onto say that the Governing Council is likely to maintain the expansion in monetary policy going into the following year as the economic recovery remains “fragile.”

Nevertheless, the economic calendar reinforced an improved outlook for future growth as German unemployment slipped 26K in October amid expectations for a 15K rise, with jobless rate falling back to 8.1% from 8.2% in the previous month, and the extraordinary efforts taken on by the government may continue to prop up the economy as the nation emerges from the worst recession in over half a century. Moreover, business sentiment in the euro-region increased to -1.78 during the same period from -2.07 in September, with economic confidence rising to a13-month high of 86.2 from 82.8, while consumer sentiment tipped higher to -18 from -19 in the previous month, and conditions may continue to improve throughout the second-half of the year as policy makers anticipate the economy to return to growth in the following year.

The British pound advanced for the fourth day and crossed back above the 100-Day SMA (1.6363) to reach a high of 1.6462 however, the lack of momentum to push above this week’s high (1.6469) may keep the GBP/USD range-bound ahead of the Bank of England rate decision next week as investors weigh the outlook for future policy. Nevertheless, the economic docket showed mortgage approvals in the U.K. jumped to an 18-month high of 56.2K in September from a revised reading of 53.0K in the previous month, with mortgage lending increasing 0.9B during the same period after rising 1.3B in the previous month, while consumer credit slipped 0.3B after falling 0.4B in August. At the same time, the M4 money supply grew 0.8% in September amid an initial forecast for a 0.7% rise, with the annualized rate increasing 11.6% from the previous year. The data reinforces an improved outlook for the U.K. housing market and suggests banks are increasing their willingness to lend as the government takes unprecedented steps to shore up the economy, and conditions may continue to improve throughout the second-half of the year as policy makers see the nation emerging from the worst recession since the post-war period.

The U.S. dollar lost ground overnight as investors raised their appetite for risk, and the reserve currency is likely to face increased volatility going into the U.S. trade as market participants anticipate the world’s largest economy to emerge from the recession in the third quarter. The advanced GDP reading is expected to show a 3.2% expansion in the third-quarter, with personal consumption projected to rise 3.1% from the three-months through June, while the core PCE is forecasted to grow at an annualized pace of 1.4% after rising 2.0% in the second quarter. At the same time, initial jobless claims are estimated to fall to 525K in the week ending October 24 from 531K, with continuing claims anticipated to weaken to 5905K from 5923K during the first full week of the month, and the data may lead the greenback to retrace the overnight decline as the outlook for growth and inflation improves. In addition, Treasury Secretary Timothy Geithner is scheduled to testify in front of the House Financial Services Committee at 13:30 GMT on financial regulation, and speculation for increased oversight of the markets may weigh on investors’ sentiment as policy makers look to overhaul the global financial system.


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