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Euro Loses Ground Despite OECD Forecast, British Pound Weakens for Third Day

The Euro slipped below the 20-Day SMA (1.4871) during the overnight session to a low of 1.4843 and continued to hold the narrow range from the previous week, and the single-currency is likely to trade sideways over the next 24 hours of trading as the global economic calendar remains fairly light for the remainder of the week.

Talking Points
•    Japanese Yen: Advances Across the Board
•    Pound: Public Borrowing Tops Forecasts, Retail Spending Improves
•    Euro: OECD Says ECB Should Maintain Loose Policy in 2010
•    US Dollar: Mortgage Delinquencies, Treasury Secretary Geithner on Tap

Euro Loses Ground Despite OECD Forecast, British Pound Weakens for Third Day

The Euro slipped below the 20-Day SMA (1.4871) during the overnight session to a low of 1.4843 and continued to hold the narrow range from the previous week, and the single-currency is likely to trade sideways over the next 24 hours of trading as the global economic calendar remains fairly light for the remainder of the week. Nevertheless, as the EUR/USD fails to hold above 1.5000, it looks as though the double-top formation on the daily chart will play out over the near-term, and we may see the pair break to the downside in the week ahead following the bearish divergence in the relative strength index.

Meanwhile, the Organization for Economic Cooperation and Development held an improved outlook for global growth and doubled its growth projections for the top 30 nations as the group expects economic activity to expand at an annual rate of 1.9% next year from an initial forecast of 0.7% in June. The OECD forecasts economic activity in the U.S. to expand 2.5% over the following year, with the Euro-Zone anticipated to grow 0.9%, while the group projects the Japanese economy to grow 1.8%. At the same time, the organization argued that the European Central Bank should maintain the expansion in monetary policy “until late 2010” as growth prospects remain weak, and went onto say that the “emergency credit support measures should be withdrawn and policy rates gradually increased as the recovery gathers momentum” as the group anticipates a “gradual” pick-up in economic activity in the following year.

The British Pound weakened against the greenback for the third-day and slipped to a low of 1.6443 during the European trade however, we may see the GBP/USD retrace the sell-off over the following week as the rally remains well-supported by the 20-Day SMA at 1.6567. Meanwhile, the economic docket showed retail spending expanded 0.4% in October amid expectations for a 0.5% rise, while the annual rate of consumption jumped 3.4% from the previous year versus forecasts for a 2.9% increase. Moreover, the public deficit in the U.K. rose GBP11.4B during the same period amid forecasts for a GBP 7.0B rise, while the public sector net cash requirement widened GBP 5.9B during the month, which exceeded expectations for a short-fall of GBP 4.0B. At the same time, the OECD said that the Bank of England should hold the benchmark interest rate at the record-low until 2011 in order to encourage a sustainable recovery, and held a cautious outlook for the region as the group sees “strong headwinds from balance sheet adjustments, a still weakening labor market and fiscal tightening.” As the group calls on the central bank to support the economy throughout the following year, market participants may scale back long-term expectations for higher interest rates as BoE Governor Mervyn King maintains an “open mind” for future policy.

The greenback strengthened against most of its major counterparts as investors scaled back their appetite for risk, and the dollar may continue to appreciate going into the U.S. trade as the reserve currency benefits from safe-haven flows. Nevertheless, the economic docket could spark increased volatility in the foreign exchange market as investors await the results of mortgage delinquencies for the third-quarter, while Treasury Secretary Timothy Geithner is scheduled to testify in front of the Joint Economic Committee on financial regulation at 15:00 GMT. In addition, the Philadelphia Fed. factory index is projected to rise to 12.2 in November from 11.5 in the previous month, while the leading indicator is expected to increase 0.4% in October to mark the seventh consecutive monthly advance, and the data is likely to encourage an improved outlook for the U.S. as the expansion in monetary and fiscal policy works its way through the real economy.

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

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