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British Pound Fails to Find Support at 20-Day SMA, Euro Maintains Narrow Range

The British Pound weakened against the greenback for the fourth day and slipped below the 20-Day SMA (1.6580) to a low 1.6516 during the European trade, and the currency may face increased selling pressures going into the North American session as investors scale back their appetite for risk.

Talking Points
•    Japanese Yen: BoJ Maintains Dovish Outlook for Inflation
•    Pound: Breaks Support at 20-Day SMA
•    Euro: German Producer Prices Hold Flat in October
•    US Dollar: Risk Trends to Drive Major Currencies

British Pound Fails to Find Support at 20-Day SMA, Euro Maintains Narrow Range

The British Pound weakened against the greenback for the fourth day and slipped below the 20-Day SMA (1.6580) to a low 1.6516 during the European trade, and the currency may face increased selling pressures going into the North American session as investors scale back their appetite for risk. As a result, we may see the GBP/USD continue to retrace the advance from the beginning of the month, and may test the the 100-Day SMA at 1.6395 for near-term support over the following week.

Meanwhile, Richard Lambert, the director of the Confederation of British Industries said that the government will need to take “ambitious” steps to reduced the public deficit in order for the Bank of England to maintain borrowing costs at the record-low for an extended period of time, and argued that the Treasury “should seek to balance the budget by 2015 or 2016” as the nation’s sovereign credit rating remains at risk. In addition, Mr. Lambert, a former BoE member, said that if the central bank keeps “nominal interest rates lower for longer, that would have an impact on sterling,” and sees a likelihood for the MPC to adopt a wait-and-see approach as policy makers gauge the impact of its emergency program.

The Euro tipped lower against the greenback for the second day, but continued to hold the range from the previous week to trade above the 50-Day SMA at 1.4806, and the single-currency may continue to trade sideways over the remainder of the month as investors weigh the outlook for future policy. European Central Bank President Jean-Claude Trichet reiterated that the Governing Council will gradually scale back its covered-bond purchases, and went onto say that “any non-standard measure whose continuation would pose a threat to the achievement of price stability must be undone promptly and unequivocally.” Meanwhile, producer prices in Germany unexpectedly held flat in October, led by a 1.0% drop in mineral prices, with the annualized rate slipping 7.6% for the second consecutive month amid forecasts for a 7.5% decline, and the ECB is likely to maintain its current policy throughout the remainder of the year as policy makers continue to see a risk for a protracted recovery.

The U.S. dollar continued to benefit from the rise in risk aversion and strengthened against most of its major counterparts during the overnight trade, and the lack of event risk should keep the reserve currency bid throughout the North American session as equity futures foreshadow a lower open for the U.S. market. Nevertheless, the economic docket for the following week is likely to spark increased volatility in the foreign exchange market as the preliminary 3Q GDP report is expected to show a downward revision to 3.0% from an initial forecast of 3.5% ahead of the Thanksgiving Holiday, while the FOMC minutes from the policy meeting earlier this month are scheduled to cross the wires at 19:00GMT on Tuesday.

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

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