Euro Poised to Test Yearly High, British Pound Continues to Trend Sideways

Talking Points
•    Japanese Yen: Consolidates Across the Board
•    Pound: Continues to Swing Sideways
•    Euro: Price Pressures Weaken for Fifth Month in October
•    US Dollar: Retail Sales, Chairman Bernanke on Tap

Euro Poised to Test Yearly High, British Pound Continues to Trend Sideways

The euro rallied against the greenback for the second day, with the exchange rate rising to a high of 1.4996 during the overnight trading session, and the single-currency looks poised to test the yearly high at 1.5064 this week as market participants ramp up expectations for higher borrowing costs in the region. Bundesbank President Axel Weber held a hawkish outlook for future policy and said that the central bank must start preparing to implement an exit strategy in an effort to balance the risks for the economy. Mr. Weber argued that there’s a risk for more turmoil if policy makers miss the appropriate time to scale back its emergency programs, and went onto say that the European Central Bank remains committed to ensure price stability across the region.

At the same time, ECB board member Miguel Angel Fernandez Ordonez expects the central bank to keep borrowing costs at the record-low going into the following year, and reiterated that “the markets do not expect any change before the second half of next year” as the recovery remains weak. Moreover, Governing Council member Nout Wellink held a cautious outlook for the region and expects unemployment to rise over the next two years, while Ewald Nowotny said reducing global imbalances will remain a “serious challenge” going forward as he sees a lower growth potential for the world economy following the crisis. Nevertheless, the economic docket showed consumer prices in Europe weakened for the fifth-month in October, with the headline reading falling 0.1% from the previous year after contracting 0.3% in the previous month, while the core rate for inflation unexpectedly held steady at 1.2% for the second-month. As the ECB maintains its one and only mandate to ensure price stability, the central bank is likely to hold a neutral policy stance throughout the remainder of the year as board members continue to see a risk for a protracted recovery and expects price growth to remain subdued over the near-term.

The British pound bounced back from the low (1.6571) to advance against the greenback for the third-day, and the currency may continue to trend higher throughout the month as the rally remains well supported by the 20-Day moving average at 1.6531. As a result, we may see the GBP/USD test the previous week’s high at 1.6846 and may retrace the sell-off from August as the economic docket is expected to reinforce an improved outlook for the U.K. However, as the RSI approaches overbought territory, we could see the pound-dollar trade sideways ahead of the Bank of England minutes due out on Thursday at 9:30 GMT as investors weigh the outlook for future policy. Meanwhile, BoE Deputy Governor Paul Tucker said banks to take greater risks may be required to pay a higher rate for deposit insurance as policy makers look to overhaul the financial system, and said that the subject “deserves serious consideration” as the government aims to restore the banking sector.

U.S. dollar price action was mixed overnight and the greenback is likely to face increased volatility going into the North American trade as investors anticipate retail sales to increase 0.9% in October after slumping 1.5% in the previous month, while the Empire State’s gauge for manufacturing is projected to fall to 30.00 in November from 34.57 in the month prior. At the same time, Fed Chairman Ben Bernanke is scheduled to speak on the economy at 17:15 GMT, and comments from the central bank head could move the currency market as participants weigh the outlook for future policy. Nevertheless, as equity futures foreshadow a higher open for the U.S. market, a rise in risk appetite could weigh on the reserve currency as investors move into higher-yielding currencies.


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

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